Meetings to discuss an international treaty to combat climate change began in earnest in 1992 at the Earth Summit held in Rio de Janeiro. Understanding the history of how we became aware of the problem of climate change and how international negotiations about responding to climate change have proceeded over the past eighteen years is crucial if we are to figure out how best to proceed from here.1
Early discoveries: French physicist Joseph Fourier first described a “greenhouse effect” in a paper delivered to the Royal Academy of the Sciences of Paris in 1824. In the 1860s research by Irish physicist John Tyndall demonstrated that carbon dioxide changes the atmospheric quality to admit entrance of solar heat but block its exit. In 1896 Swedish chemist Svante Arrhenius was the first to propose the idea of an artificial greenhouse effect caused by burning coal—which he speculated would be desirable since future generations would live under “a milder sky.” In the 1930s British engineer Guy Stewart Callendar collected temperature statistics from around the world and concluded that the mean global temperature had risen markedly in the previous century, which he attributed to an increase in carbon dioxide levels of 10 percent over the same period. In the 1950s work by Gilbert Plass at Johns Hopkins University and Hans Suess and Roger Revelle at the Scripps Institute of Oceanography led to a seminal article published by Revelle and Suess in 1957 warning that “humans are now carrying on a large-scale geophysical experiment.” In 1958 Revelle and Suess employed geochemist Charles Keeling to continuously monitor carbon dioxide levels in the atmosphere, leading to the famous “Keeling curve,” which charts annual increases in carbon concentrations right up to today. In 1963 the Conservation Foundation estimated that a doubling of the carbon dioxide content of the atmosphere would raise mean global temperatures by close to 4 degrees Celsius, and in 1979 NASA went on record saying: “There is no reason to doubt that climate change will result from human carbon dioxide emissions, and no reason to believe that these changes will be negligible.”
But there is a difference between (1) awareness among a few researchers working in an obscure scientific subfield, (2) concern on the part of a large group of scientists specializing in the officially recognized scientific field of climatology, (3) virtual consensus within the entire scientific community that there is a potentially big problem, (4) popular awareness of a looming climate crisis, (5) discussion of remedies by political leaders, and finally (6) international meetings to address climate change attended by official delegations from most countries as well as experts and groups of concerned citizens.
Preliminary meetings: The first World Climate Conference in 1979 was attended mostly by scientists who warned of the threat of climate change and called on nations to anticipate and guard against dangers. This was followed by a meeting in Villach, Austria, in 1985 and the famous 1987 Brundtland Commission report, Our Common Future, discussed in Chapter 3. Scientists attending workshops sponsored by the Beijer Institute decided that the scientific issues must be clarified before a political response would be forthcoming, and an interdisciplinary group of scientists from all parts of the world, including physicists, atmospheric scientists, biologists, and economists, began work as part of the Intergovernmental Panel on Climate Change (IPCC), created in 1988 by the World Meteorological Organization and by the United Nations Environment Program. Ever since, the IPCC has provided reports based on scientific evidence that reflect the dominant viewpoints of the global scientific community.
In 1988 Dr. James Hansen of the NASA Goddard Institute for Space Studies at Columbia University testified before the U.S. Senate that based on computer models and temperature measurements he was 99 percent sure that the greenhouse effect was already changing the climate. The Second World Climate Conference in Geneva in 1989 included representatives from many governments who called for creation of an international convention on climate change. The United Nations responded by creating the United Nations Framework Convention on Climate Change (UNFCCC), which became the international body charged with negotiations to address climate change. In 1990 the IPCC’s first report predicted that average global temperatures would increase faster over the ensuing 100 years than during any century in the previous 10,000 years.
The Earth Summit in Rio: However, international negotiations about how to respond to the threat of climate change only began in earnest in Rio de Janeiro in 1992 at the United Nations Conference on Environment and Development, popularly known as the Earth Summit. The Earth Summit is where the UNFCCC was signed by 154 nations (now more than 190 countries have signed). The document contains a number of important principles including a commitment to preserve the climate system for the benefit of present and future generations, recognition of the precautionary principle as the defining reason for global action to prevent climate change, and identification of “sustainable development”—defined as policies that satisfy the basic needs of the present without jeopardizing the rights of future generations to satisfy their needs—as our economic goal. But most importantly, Article 4 of the 1992 UNFCCC establishes the principle of common but differentiated responsibilities for mitigating climate change based on countries’ contribution to the buildup of greenhouse gases (GHGs) in the atmosphere and ability to afford reductions. Article 4 further stipulates that industrial nations must take the lead in emissions reduction and that developing nations would not be asked to reduce their emissions without compensation.
However, after much discussion, country delegations in Rio were unable to agree on mandatory reduction targets for industrial countries. Instead, countries were strongly encouraged to make voluntary reductions according to “responsibility” and “capability,” and more developed countries (MDCs) were encouraged to help less developed countries (LDCs) reduce emissions by providing technological and financial aid. In Rio the Conference of the Parties to the Convention (COP) was created to organize future meetings and make whatever decisions were necessary to secure UNFCCC objectives: stabilize GHG concentrations to prevent dangerous interference with the climate system and enable sustainable economic development to proceed.
The UNFCCC entered into force in 1994 and the IPCC became the official scientific advisory board to the COP. In 1995 the IPCC stated for the first time in an official report that it found a “discernable effect of human carbon emissions on the earth’s climate.” However, it became quickly apparent that most countries were not on track to meet their nonbinding reduction goals and that the principle reason was not doubts about the danger of climate change. Instead, the chief obstacle was fear of incurring significant economic costs to reduce emissions with no guarantee that others would do their fair share, and therefore that one’s sacrifices would prove unfruitful. Discussion gravitated around this dilemma at COP meetings held in Berlin and Geneva between the 1992 meetings in Rio and the 1997 meetings in Kyoto, and also at important meetings of other organizations like the Organization of Economic Cooperation and Development (OECD), which hosted a conference on this subject in 1993.
The Kyoto Protocol: On December 11, 1997, after difficult negotiations that until the last minute seemed destined to break down, very much as negotiations would break down twelve years later in Copenhagen, 160 nations voted at COP 3 to approve a document known as the Kyoto Protocol.
The agreement requires industrialized countries, classified as Annex-1 signatories, to cut their emissions of six major GHGs by an average of 5.2 percent below their 1990 emission levels by the period 2008–2012. However, for equity reasons and because of some special circumstances the percentage reductions for Annex-1 countries differ. For example, the mandated reduction for the European Union is 8 percent, for the United States (had it signed) is 7 percent, and for Canada is 6 percent. Iceland, on the other hand, is allowed to increase emissions by 10 percent, Australia by 8 percent, and Norway by 1 percent. Russia, Ukraine, and New Zealand were simply required to maintain emissions at 1990 levels—that is, a 0 percent change. LDCs, designated as non-Annex-1 signatories, were assigned no mandatory reductions to be achieved by 2012, but were asked to reduce their emissions voluntarily with technological and financial help from MDCs.
At the insistence of U.S. negotiators, European delegations at COP 3 in Kyoto agreed at the last moment to permit “carbon trading”—although key details remained to be worked out at subsequent COP meetings. While the Kyoto Protocol called on Annex-1 countries to meet their commitments “predominantly” from domestic reductions, it sanctioned three kinds of carbon trading: (1) Annex-1 governments that fail to meet their national caps can purchase emission rights from other Annex-1 governments emitting less than their national caps allow; (2) individual sources in Annex-1 countries can buy emission rights—referred to variously as offsets, credits, or allowances—from sources in other Annex-1 countries; and (3) individual sources in Annex-1 countries can purchase emission rights from projects located in non-Annex-1 countries that are certified by the executive board of the Clean Development Mechanism (CDM) as reducing emissions in the non-Annex-1 country above and beyond what would have occurred had the project not been undertaken. Finally, the Kyoto Protocol contained a trigger mechanism stating that the agreement would not go into effect as a binding treaty until enough Annex-1 countries had ratified the agreement to account for at least 55 percent of total emissions from all Annex-1 countries in 1990.
From Kyoto to Copenhagen: Even as the Kyoto Protocol was being approved by delegations from 160 countries in Kyoto, the U.S. Senate ominously passed a resolution 95 to 0 against any treaty that did not require developing countries to make “meaningful” cuts in emissions. In 2001 President George W. Bush officially renounced the protocol and the United States withdrew from participation. Nonetheless, the European Union ratified the treaty in 2002, and after Russia ratified in November 2004, the Kyoto Protocol became a legally binding treaty on February 16, 2005. Australia ratified the treaty in 2007, leaving the United States as the sole country not to have done so.
Final rules regarding carbon trading were worked on at the COP 7 meetings in Marrakech. The Marrakech Accords set no quantitative limits on emissions trading and allowed significant credits for forest and cropland management, but set caps on CDM and sequestration credits and allowed no credits for forest preservation. At subsequent COP meetings in Bali and Poland, new provisions to discourage deforestation and forest degradation known as REDD (which are reviewed in Chapter 9) were prepared to be voted on in Copenhagen.
The most crucial change in the history of thinking about how to avert climate change was understanding the free-rider problem when different actors are responsible for providing a public good. When any country reduces carbon emissions, its citizens bear the entire cost of doing so, while most of the benefit from those reductions is enjoyed by citizens of other countries. This is not to say that a country’s own citizens do not benefit when domestic emission reductions help avoid climate change. But since everyone benefits from averting climate change, this means that even for China, where roughly 1 billion of the 6 billion people on earth live, five-sixths of the benefits from reducing GHG emissions in China are enjoyed by non-Chinese citizens. For every other country, the fraction of the total benefit that comes from their own emission reductions is even smaller. Because there is little incentive for countries to take into account benefits from their behavior for citizens of other countries, this means that when comparing the costs to their own citizens with the benefits to their own citizens, countries will predictably reduce carbon emissions by far less than is warranted when we compare the costs to all of the benefits. This in turn means that global reductions, the sum of all national reductions, will predictably be far less than scientists say are necessary to stabilize atmospheric concentrations at levels that are safe. Economists’ shorthand way of summarizing this problem is to point out that all countries have a perverse incentive not to reduce their own emissions, but instead hope to “ride for free” on the reductions of other countries.
At the Earth Summit in Rio in 1992, too few participants appreciated the severity of the free-rider problem or were willing to take difficult but necessary steps to do something about it. But after watching emissions continue to climb despite nonbinding promises to the contrary made by MDC delegations in Rio, a majority of delegations arriving at Kyoto in 1997 realized that they could no longer avoid hammering out an agreement that set binding caps on national emissions. They realized that the only way to change outcomes was to change the calculus of national self-interest. And they realized that this is what an international treaty can and must do. When binding caps are mutually agreed to, this can change the calculus of national self-interest to better align with the global interest of achieving sufficient global reductions to avert cataclysmic climate change. When national reductions are mutually agreed to, the benefits each country achieves for its own citizens by agreeing to reduce its own emissions are expanded manyfold because this commitment wins its citizens the additional benefits from all the reductions made by other countries as well. We might say this difference “makes all the difference in the world,” but it requires mutual agreement on binding reductions. When negotiators sat down in Kyoto in 1997, they finally realized they had to bite the bullet and secure an agreement on binding caps.
After overcoming inevitable resistance to the loss of sovereign power over GHG emissions implied by a treaty that imposes binding caps on national emissions, negotiators in Kyoto still faced three major problems: (1) how to make the treaty effective—that is, guarantee sufficient global reductions to reduce the risk of cataclysmic climate change to an acceptable level; (2) how to distribute the costs of averting climate change fairly, or equitably among countries; and (3) how to make the treaty efficient—that is, how to minimize the global cost of averting climate change.
Effectiveness: Most negotiators at Kyoto probably realized that a 5.2 percent reduction in emissions by 2012 was not likely to be enough to do what scientists were insisting even then was necessary. Of course, since the 5.2 percent reduction was only to be imposed on emissions from MDCs, this was even less likely to prove effective even though MDCs accounted for 60 percent of global emissions. A little over 5 percent is what delegations agreed to because no higher reduction target was deemed politically feasible since many of their governments faced domestic opposition to ratifying a treaty that required greater reductions. It was also invariably described as a first step, which some defended as a significant and worthy first step and others criticized as woefully inadequate.
Equity: Even if all countries could be expected to benefit to the same degree from averting climate change—which is not the case—is it reasonable and fair to expect all countries to shoulder the burden of doing so to the same extent—that is, to reduce their national emissions by the same percentage? Article 4 of the UNFCCC approved in Rio in 1992 established the principle of “common but differentiated responsibilities and capabilities.” As explained above, negotiators in Kyoto implemented this mandate and addressed the problem of equity by dividing countries into two groups, MDCs and LDCs, and assigning mandatory caps only to MDCs.
As mentioned above, not all Annex-1 countries were assigned the same percentage reductions. Negotiators in Kyoto had to consider reasons for any differences among Annex-1 countries on a case-by-case basis, but regardless of the ad hoc nature of this process, the reductions for each Annex-1 country were mutually agreed to by 160 countries who signed the protocol. All other countries were assigned no mandatory emissions reductions on grounds that reducing emissions, at least initially, would detract from their ability to accomplish what should be their primary task of economic development.
Efficiency: Once caps were agreed to for different Annex-1 countries, negotiators at Kyoto faced the dilemma of whether to require countries to meet their caps entirely through internal reductions or to allow some kind of trading of “emission rights.” Proponents of emissions trading—the U.S. delegation chief among them—presented a strong case that, absent opportunities to trade, the global pattern of emission reductions agreed to as (at least roughly) fair was likely to be very inefficient—that is, the global cost of achieving the reductions was likely to be much higher than necessary. Any method for assigning caps equitably without allowing trading will leave the cost of the last ton of emissions reduced in some countries much higher than in other countries. This means that by relocating the last ton reduced in a country where the cost is higher to a country where the cost is lower instead, we can lower the global cost of reductions. Proponents argued that self-interested trading in emission rights could achieve these efficiency-enhancing relocations while retaining an equitable distribution of emission rights by separating who pays for a reduction from where the reduction is located. If LDCs without caps are also permitted to sell emission rights, as they are through the CDM of the Kyoto Protocol, trading will also generate a predictable flow of income from MDCs purchasing emission rights to sources in LDCs where abatement is cheaper.
As explained above, the 1997 Kyoto Protocol accepted trading in principle with some limitations, leaving details to be hammered out later during negotiations in Marrakesh and Bali. Controversies surrounding the Kyoto Protocol and emissions trading are discussed at length immediately below and in Chapters 9 and 10 as well. However, interested readers would do well at this point to read the Appendix to Part IV, Exercise on Climate Control Treaties (see page 215), which graphically illustrates the interplay of efficiency and equity in an international cap-and-trade climate treaty, with and without different kinds of emissions trading.
In a true cap-and-trade program, aggregate emissions from all sources are capped. The Kyoto Protocol is not a true cap-and-trade program because emissions are capped only for Annex-1 countries, the MDCs, but not for non-Annex-1 countries, the LDCs, and therefore global emissions are not capped under Kyoto. Critics complain that this feature of Kyoto is highly problematic because it means carbon trading can undermine the treaty’s ability to reduce overall global emissions. It is important to examine carefully this claim that carbon trading punctures holes in the global emissions cap and that therefore Kyoto deceives people into thinking we are addressing climate change when in fact we are not.
Trading between Annex-1 governments: Under the Kyoto Protocol, each Annex-1 country has agreed to reduce annual emissions from within its territory in 2012 by a specified percentage as compared to its annual emissions in 1990. This implies a cap on the number of tons each Annex-1 country is permitted to emit in 2012.
Suppose the government of Japan exceeds its cap by 10 million tons. If Canada comes in under its cap by 10 million tons, then Canada can sell “credits” for 10 million tons to Japan, which Japan can use to meet its cap. As long as Canada actually reduced its emissions by 10 million tons more than required by Kyoto, then total emissions reduction in Canada and Japan together is obviously exactly what it would have been had each country met its Kyoto quota through internal reductions. Moreover, as will be discussed in Chapter 9, monitoring to make sure this is the case requires only the ability to verify national emissions, which is necessary even if Annex-1 countries were not permitted to trade credits with each other.
So if Annex-1 governments meet their treaty obligations, it is impossible for any trading between Annex-1 governments, by which a country that exceeds its cap buys credits from a country that comes in under its cap, to undermine the overall emissions reductions those countries agreed to.
Trading between individual sources in different Annex-1 countries: Suppose a Japanese power company buys certified emissions reductions (CERs) for 100 tons of carbon emissions from a Canadian power company. This allows Japan to exceed its national emissions under Kyoto by 100 tons because after counting actual reductions in Japanese emissions any CERs purchased by sources inside Japan from sources outside Japan are added to Japan’s measured, national reductions, just as any credits purchased by the Japanese government from other Annex-1 governments are added to Japanese measured reductions. However—and this is the crucial point—when a source within Canada sells CERs for 100 tons to a source outside Canada, Canada must now reduce emissions by 100 tons more than its Kyoto reduction quota because after counting reductions from within Canada any CERs sold by sources inside Canada to sources outside Canada are subtracted from measured Canadian reductions, just as any credits sold by the Canadian government to other Annex-1 governments are subtracted from measured Canadian reductions.
If the CERs sold by the Canadian power company are legitimate—that is, the Canadian power company actually reduced its emissions by 100 tons more than it would have otherwise, thus actually lowering Canadian emissions by 100 tons, then it is easy to see that trading CERs did not reduce total emissions reductions in Canada and Japan combined. The 100 tons the Japanese power company did not reduce is made up for by the 100 additional tons the Canadian power company did reduce. But what if CERs are not legitimate? What if the Canadian seller of CERs is cheating?
A great deal of criticism has been focused on private parties who buy CERs that are not legitimate in lieu of reductions in their own emissions. These bogus CERs may not deserve certification because no actual reduction on the part of the seller took place or because the actual reduction was less than the amount certified. They may not be legitimate because the reduction would have taken place anyway—that is, it was not “additional” to what the seller would have achieved in any case. Or the bogus CERs may not deserve certification because the additional reduction that took place allowed an increase in emissions somewhere else in the country that would not have been possible otherwise.
Moreover, critics point out correctly that the Japanese power company buying the CERs has no reason to care if the CERs are legitimate or not. The market for CERs is not like the market for apples, where the buyer can generally be relied on to monitor the integrity of the exchange by refusing to pay for rotten apples. The piece of paper certifying the CERs is the only thing that matters to the Japanese power company because that is all it is required to present to the Japanese government in lieu of a 100-ton reduction in its own emissions. What really did or did not take place in Canada is of no concern to the Japanese buyer of the CERs. Nor does the Japanese government care if the CERs it will accept without question from the Japanese power company is legitimate. The Japanese government will present those CERs for a 100-ton reduction to those in charge of verifying that Japan has met its treaty obligations, who will simply add those CERs for 100 tons to the measured reductions from within Japan, also with no questions asked. Much of the literature criticizing carbon trading consists of exposés of cases where certification and sales have taken place when the reductions were not legitimate in one of these ways. But what critics fail to understand is that if the seller of a bogus CER is located within an Annex-1 country, this does not erode overall emission reductions as long as the seller’s Annex-1 country is forced to comply with its national obligations under Kyoto.
Suppose the CERs for a 100-ton reduction sold by the Canadian power company to the Japanese power company are completely bogus—a pure hoax. Under Kyoto, Japan can now emit 100 tons more than it would have been permitted to otherwise. The Canadian power company, by assumption, will not emit any less than it would have in any case. However, the country of Canada will now be required to emit 100 tons less than it would have been required to otherwise because a source within Canada sold CERs for 100 tons to a source outside Canada, and those responsible for verifying that Canada has met its Kyoto treaty obligations will add 100 tons to the reductions Canada is required to make. So actual global reductions will be exactly equal to the global reductions agreed to by Canada and Japan even if the CERs are totally bogus, as long as the Canadian government is forced to meet its obligations under Kyoto.2
In other words, the effort to avert climate change is not “cheated” when sources in Annex-1 countries sell bogus CERs to sources in other Annex-1 countries. But if not the environment, then who has the devious Canadian power company cheated by accepting a handsome payment for doing nothing? Usually when a seller cheats—for example, by selling a rotten apple—it is the buyer who is cheated. However, in this case the Japanese power company got exactly what it wanted—the CERs for 100 tons that allowed it to emit 100 tons more than it could have otherwise. But if neither the environment nor the buyer of the bogus CERs were cheated by the Canadian power company scam, then who was cheated? Could this be one of those so-called crimes without victims? Unfortunately not.
The Canadian power company has cheated its fellow Canadians. By selling bogus CERs, it has forced Canada to reduce its emissions by 100 more tons than it would have had to otherwise. Somebody else in Canada is going to have to reduce its emissions by 100 more tons than it should have had to. Or somebody else in Canada is going to have to buy CERs for 100 tons from a source outside Canada it should not have had to buy. Or the Canadian government is going to have to buy credits for 100 tons from another Annex-1 government that it should not have had to buy to avoid being in violation of the Kyoto Treaty. The cap on Canadian national emissions will force some other Canadians to make up the difference and plug the hole the devious Canadian power company punctured in the global cap when it sold a bogus CER to the Japanese power company. It is these other Canadians who are the victims when a source in Canada sells bogus CERs to someone in another country.
This means that governments of Annex-1 countries have good reason to try to prevent private parties located in their national territory from selling bogus CERs to foreigners because this will harm other citizens and make it more difficult for the government to meet its treaty obligations. But even if CERs sold by sources in Annex-1 countries are completely bogus, this cannot erode the cap on aggregate emissions from all Annex-1 countries that Kyoto has established.
The key is that the international treaty organization must be able to measure aggregate, annual emissions from Canadian territory in 2012. Once this is done, any Canadian government sales of credits to other Annex-1 governments, and any private sales of CERs by parties within Canada to parties outside Canada, are added to measured emissions, and any Canadian government purchases of credits and any private purchases of CERs by parties within Canada from parties outside Canada are subtracted from Canadian measured emissions. Those verifying Canadian compliance with its obligations under Kyoto simply compare the resulting number to the cap Canada committed to when it agreed to (1) its percentage reduction by 2012, and (2) a figure for Canadian emissions in 1990. If measured emissions in Canada, plus credits and CERs sold to outsiders, minus credits and CERs purchased from abroad, are higher than Canada’s cap, the government of Canada is in violation of its treaty obligations and subject to whatever sanctions have been established. Moreover, the treaty must be able to measure national emissions from Canada in 2012 and force Canada to comply with its treaty obligations in any case, whether or not carbon trading takes place.
In Chapter 9 we discuss measurement issues at length. But the important point for present purposes is that while Canada may question the initial estimate of its 2012 emissions and petition for adjustments, most observers believe that arriving at an agreement between countries and those charged with verifying national compliance with the treaty about what the countries’ actual national emissions are in 2012 will not be overly difficult. In other words, in Chapter 9 we will discover a second counterintuitive truth that is also responsible for a great deal of misunderstanding: Measuring annual national emissions is far easier and less controversial than measuring how much a particular project reduced emissions and therefore how many CERs the project should be awarded.
In conclusion, if Annex-1 governments meet their treaty obligations, then it is impossible for any trading between individual sources in Annex-1 countries to undermine the overall emissions reductions those countries agreed to—no matter how much chicanery is involved in the certification and trading process. This is an important point that many critics fail to understand.
Trading between Annex-1 and non-Annex-1 countries: Critics point out that Kyoto allows governments and private parties in Annex-1 countries that are capped to purchase CERs from projects located in non-Annex-1 countries where emissions are not capped through the CDM. Critics argue that carbon trading between Annex-1 and non-Annex-1 countries through the CDM undermines the effort to reduce global emissions since countries with caps can avoid domestic reductions by purchasing CERs from countries that are permitted to increase emissions without limit. In this case critics have a valid argument—but only if the CDM accreditation process fails to work as it is supposed to. Whether this is likely to be the case we consider below. However, first it is important to understand that if the accreditation process accomplishes its mission, carbon trading through the CDM mechanism does not diminish global reductions and can generate very large transfers of income from MDCs to LDCs.
The CDM executive board is supposed to grant CERs to projects in non-Annex-1 countries only if the project represents a real reduction in GHG emissions, if the reduction is beyond what would have occurred had the project not taken place, and if the project does not cause an increase in emissions elsewhere in the country. As we will discover in Chapter 9, this is not an easy task since it requires establishing a hypothetical scenario of what would have happened had the project never occurred—which can be problematic. However, if the CDM executive board evaluates projects accurately, carbon trading through the CDM does not undermine global emission reduction targets. Instead, it merely lowers the cost of reductions and distributes the efficiency gain from doing so between MDC purchasers and LDC sellers of CERs.
Under Kyoto there is a cap on Canadian emissions but not on Mexican emissions. Suppose a company in Mexico sells a CER to a company in Canada. Further suppose the CDM executive board did its job and the reduction is real, additional, and causes no leakage. So far the trade reduces global emissions by the same amount as if the Canadian company had reduced emissions itself and the project in Mexico had never occurred. The only difference is that the reduction took place in Mexico.3 However, since there is no cap on emissions in Mexico, it is possible that Mexican emissions will increase. Rather than achieving a reduction in global emissions by mandating a reduction inside Canada, instead we get no reduction in emissions in Canada because the Canadian company instead bought an allowance from Mexico, and even though the Mexican company that sold the CER did reduce its emissions more than it would have otherwise, and even though this did not cause an increase in emissions somewhere else in Mexico, nonetheless, other sources in Mexico might increase emissions, leaving us with no reduction or even an increase in global emissions.
With no cap on Mexican emissions, this could happen. However, when CERs are legitimate, it is not trading that causes this problem; rather, it is the lack of a cap on Mexican emissions that makes it possible for emissions in Mexico to increase. Since so many critics have misunderstood this issue, it warrants more careful scrutiny at risk of belaboring the obvious. For those who are still not convinced that permitting trading between countries with caps and countries without caps does not erode global reductions as long as CERs are legitimate and in accord with CDM guidelines, consider what would happen if no trading were allowed between sources of emissions in Canada and Mexico. Mandated reductions for wealthy, industrialized countries, no mandated reductions for developing economies, and no trading is what some critics who want to shut down the CDM favor.
Under such a program where no trading is allowed, we would get reductions in emissions from sources in Canada, but there would be no reason for sources in Mexico to do anything different from what they were going to do anyway. If sources in Mexico were going to reduce emissions, they would still reduce them. If they were going to increase emissions, they would still increase them. It is possible that global emissions would fail to decline because emissions in Mexico might increase by more than emissions decline in Canada. But this is obviously not because we allowed trading—since we did not allow trading in this scenario. Instead, it is because we failed to cap emissions in Mexico. Moreover, both Mexico and Canada would be worse off because trading was prohibited. Sources in Canada would have to pay more to reduce their own emissions than it would cost them to buy legitimate CERs from Mexico. And sources in Mexico would be unable to profit from selling legitimate CERs for more than it cost them to reduce their emissions. In sum, no useful purpose is served by prohibiting trading as long as CERs are “real,” “additional,” and do not cause “leakage.”4
But some CERs approved by the executive board of the CDM clearly have not been legitimate. It is not easy to establish a hypothetical baseline scenario or determine how much more a project reduced emissions than emissions would have fallen anyway, much less be sure the project did not allow for an increase in emissions someplace else in the country. And if CERs are not legitimate—that is, if the accreditation process fails to carry out its admittedly challenging mandate successfully—then criticisms that trading through the CDM punctures holes in Kyoto’s cap on aggregate emissions from all Annex-1 countries are valid. If the CDM awards more credits than are warranted, trading will cause global reductions to be less than planned since non-Annex-1 countries without caps do not have to make up for any shortfall due to sales of illegitimate CERs with real reductions elsewhere in their countries. Moreover, since governments of non-Annex-1 countries selling CERs have no incentive to police the legitimacy of CERs sold by their residents, and since the buyers and sellers of CERs never have any incentive to guarantee that the CER represents a real, additional emission reduction, there is every reason to be concerned.
In conclusion, a great deal has been written criticizing carbon trading under the CDM of the Kyoto treaty. Most of the valid criticisms expose cases where CDM authorities failed to ensure that reductions were additional and without leakage, in which case the failure of the executive board to carry out its mandate does puncture holes in the aggregate cap on Annex-1 emissions and undermines our ability to achieve the global emissions reduction planned under Kyoto. However, much of the criticism is not compelling. Many critics fail to acknowledge dramatic improvements in monitoring after the first year of the program, including a significant tightening of standards. Many critics wrongly criticize what they consider over- or underpaying for CERs as undermining global reductions or “inefficient,” even though the price paid for CERs has no bearing on reductions or efficiency, but only on equity.5 Plus few critics make any attempt to compare the beneficial effects of CER trades that are legitimate with ill effects from CER trades that are not. More importantly, critics fail to consider obvious ways to correct the flaws in Kyoto that make carbon trading through the CDM mechanism problematic. Changes that render all objections to full international carbon trading moot, including objections to selling offsets for sequestration increases, are discussed in Chapter 10.
1. For an insightful and highly readable treatment of international climate negotiations see Chichilnisky and Sheeran (2009).
2. This conclusion is so counterintuitive that many people completely misunderstand the point. The result is a great deal of misplaced criticism of carbon trading. As a matter of fact, even professional environmental economists sometimes misunderstand this point.
3. While the location of the reduction has changed, the trade has not changed who pays for the reduction. The Canadian company has paid for the reduction—presumably less than it would have cost to make the reduction itself in Canada—even though the reduction took place in Mexico.
4. Many critics fail to understand that carbon trading of legitimate CERs under the CDM not only reduces the cost of compliance for MDC sources and governments—which is good, not bad, because it makes it easier to lower MDC caps even further—but also provides a substantial benefit to LDCs, as explained in Chapter 9.
5. Some climate justice activists who want to shut down the CDM cite the work of Michael Wara, at the Stanford Program on Energy and Sustainable Development and Stanford Law School, who supports an “improved” CDM (Wara 2006; Wara and Victor 2008). Wara strongly criticized the CDM executive board certification of CERs for capturing and destroying HFC-23 at refrigerant plants and N2O at Teflon plants in China in the first year of the program. But his criticism was that MDC buyers paid much more for these CERs than it cost Chinese sellers to make the emission reductions, which Wara incorrectly described as “inefficient.” In fact, the price paid for CERs has nothing to do with efficiency but only with how the efficiency gain from trade is distributed between buyers and sellers of CERs. It is ironic that climate justice activists cite work whose criticism was that too much of the efficiency gain from CER trade went to sellers in LDCs and too little was captured by MDC buyers as reason to shut down the CDM.