The Kyoto treaty, which went into effect in 2005 and has now been ratified by every country except the United States, will expire in 2012. In this chapter we first review what Kyoto got right before carefully evaluating various criticisms that have been voiced.
The Kyoto Protocol has been criticized from every conceivable angle. In Chapter 8 we discovered that some criticisms of carbon trading under Kyoto are misplaced while others have merit. But Kyoto got a number of key issues right, and as we look forward to a post-Kyoto treaty it is important to understand what is right about the Kyoto Protocol as well as what is wrong.
The first thing negotiators in Kyoto got right was that climate change will not be averted unless countries mutually agree to binding emission reductions in an international treaty. As discussed in the previous chapter, any idea that voluntary actions on the part of countries, or even small groups of countries in consort, will secure reductions sufficient to avert climate change is pure fantasy. Theory predicts that a voluntary approach will not work. The free-rider dilemma is a huge obstacle to averting climate change, and anyone who fails to understand this has no hopes of solving the problem. Moreover, the historical record between the meetings in Rio and in Kyoto five years later confirms what theory predicted. When signatories to the United Nations Framework Convention on Climate Change (UNFCCC) reconvened in Kyoto, they had no choice but to admit that lofty promises made in Rio had, by and large, proved empty, as global emissions had continued to escalate between 1992 and 1997.
Unlike the participants in Rio in 1992, those assembled in Kyoto in 1997 recognized the essential relationship between all international treaties and national sovereignty. Sovereignty leaves countries free to do as they please, which implies that if an action benefits a country enough to outweigh the costs to the country itself, treaties are not generally required to compel such behavior. Treaties are needed to elicit behavior only when the costs of an action exceed the benefits to the country itself, and the enforcement of a treaty will inevitably be felt as an infringement on national sovereignty. What makes it worthwhile for a country to sign treaties even though they infringe on its sovereignty and require behavior whose costs exceed the benefits for the country itself is that the country gets something in exchange. In general, what the country gets in exchange is a commitment from other countries to do likewise. The key point is that these commitments from other countries can dramatically change the calculus of national self-interest. In the case of climate change, it would not benefit individual countries more than it costs them to reduce their own emissions if others do not do likewise because no single country can prevent climate change. On the other hand, if a country’s reduction wins similar reductions from other countries in exchange, then the benefit to each country from its own reduction combined with everyone else’s reduction can far exceed its own reduction costs. This is why emission reductions must be mutually agreed to and binding.
The second thing Kyoto got right was that a diplomatic mechanism is necessary to overcome the incentive for every country to wait for other countries to sign a treaty before it does. In particular, Annex-1 countries had every reason not to sign the Kyoto Protocol until other Annex-1 countries had signed before them. The Kyoto Protocol finessed this “Alphonse-Gaston” problem by creating a trigger mechanism often used by international diplomats. The protocol stipulated that the treaty would not become binding until enough Annex-1 countries had ratified the treaty to account for 55 percent of emissions from all Annex-1 countries in 1990. This removed the disincentive for a country to sign for fear that it would have committed itself to mandatory reductions only to discover that other Annex-1 countries had failed to do so, choosing instead to ride for free on early signers binding commitment.
Of course, in the end not all Annex-1 countries did sign the Kyoto Protocol—the United States chose instead to free ride. And with the benefit of hindsight it is also apparent that the trigger mechanism failed to eliminate all advantages for late signers. While Japan, for example, signed quickly, Russia delayed signing until it became the last hope of reaching the necessary 55 percent threshold after President Bush was reelected in 2004 and it was clear that the United States would continue its refusal to sign. By delaying ratification, Russia gained leverage that Japan did not enjoy as an early signer. Russia parlayed its leverage to increase its ability to profit from the fact that the dramatic decline in Russian gross domestic product (GDP)—and therefore carbon emissions—after 1990 left projected Russian emissions for 2012 well under its cap. As a condition for signing, Russia insisted that Annex-1 countries be permitted to buy more allowances in the international carbon market than had been initially agreed to in Kyoto, knowing this would increase the demand and therefore the price of allowances in a market where Russia had every reason to expect to be a big seller. But at least the trigger mechanism protected countries that were willing to commit early to mandatory reductions in exchange for a substantial portion of similar countries doing likewise from fear of a terribly nasty surprise. The trigger mechanism meant that if most other countries failed to sign, early signatories were not bound by any commitments because the treaty would not go into effect.
But the most important thing that Kyoto got right was the recognition that countries bear different responsibilities for causing climate change, countries have different capabilities to bear the costs of averting climate change, and efforts to mitigate climate change should reflect these “differential responsibilities and capabilities.” Kyoto explicitly recognizes that countries where the majority of citizens have yet to enjoy the benefits of economic development should not be expected to bear the same burdens as more developed countries in order to prevent climate change. As discussed in the previous chapter, the Kyoto Protocol implemented this fundamental commitment to fairness in a very dramatic and palpable way by requiring mandatory emission reductions only from more developed, Annex-1 countries. Underdeveloped countries were classified as non-Annex-1 countries, which were not subjected to mandatory caps under Kyoto.
Failure to treat differently countries that do bear different responsibilities and do have different capabilities would make an international treaty unfair. Any treaty that effectively denies poor countries any real possibility of economic development would be inhumane and unconscionable. Unlike Rio, Kyoto did not honor fairness only with pretty words and unenforceable intentions. Instead, Kyoto embedded fairness into the core structure of the treaty itself. Not surprisingly, many criticisms and proposals to revise Kyoto have had the purpose of “correcting” this atypical historical “error” and putting us back on the usual track of meaningless genuflections toward international economic justice without any substance.
A major criticism of Kyoto is that it did too little to reduce global emissions. Many environmentalists and climate scientists have pointed out that a beginning is not a solution, and while a beginning may be acceptable progress toward solving some problems, beginning to solve a life-and-death problem is not worth much if it still leaves you dead. Even in 1997 the consensus among climate scientists was that a 5.2 percent global reduction in emissions of Annex-1 countries only by 2012 was not a strong enough beginning to avert climate change. Critics also charged not only that failure to cap emissions in less developed countries (LDCs) created the possibility that any reduction in more developed countries’ (MDC) emissions would be canceled out by increases in LDC emissions, but also that the Clean Development Mechanism (CDM) would puncture holes in the cap on MDC emissions and thereby weaken the effectiveness of the treaty even more. Having begun discussion of these criticisms of carbon trading in Chapter 8, we examine charges that carbon trading makes Kyoto little more than a scam later in this chapter.
More importantly, every year since 1997 has provided new evidence about the pace and dangers of climate change and indicated that even deeper reductions than previously believed necessary are required. The science also indicates that the sooner emission reductions are made, the more effective they are at averting the crisis. So promising bigger reductions later, particularly when those making the promises know they will no longer be in office when the bigger cuts come due, is a predictable ploy we should not fall victim to. In other words, a commitment to reduce emissions by a certain amount over the next five years is far more credible than a commitment to reduce emissions by a much larger amount thirty-five years from now. Both science and politics call for front-loading rather than back-loading the global emission reduction schedule.
Before the climate Conference of the Parties (COP) meetings in Copenhagen in December 2009, the need to reduce global emissions more than Kyoto had called for was widely acknowledged by many government delegations as well as by almost all environmentalists. Demands for reductions of 80 percent or more by 2050 and refusal to settle for reduction schedules that are backloaded were strongly supported by environmental non-governmental organizations (NGOs), demonstrators in the streets of Copenhagen, and delegations from threatened island nations and many of the world’s poorest countries. Unfortunately, popular sentiment that we need to pick up the pace in setting and enforcing reduction targets received no support in the form of concrete commitments from key government delegations.
Perhaps no area of climate policy is more misunderstood than measuring and monitoring. As explained in Chapter 7, all environmental policies require monitoring and enforcement, and we should not expect any policy to be self-enforcing because under any policy polluters are better off if they can claim they have emitted less than they actually have. But with regard to an international climate treaty there is a huge difference between (1) monitoring country compliance with caps on national emissions during a calendar year (i.e., policing governments who are the signatories), and (2) figuring out how much credit to award a particular project for reducing emissions (i.e., policing the international carbon market). Failure to understand crucial differences between the measurement problems posed by these two completely different tasks has been the source of a great deal of confusion and many misplaced criticisms of Kyoto.
Of course, when we measure national emissions during an entire calendar year, the scale of what we measure is much, much greater than measuring how many tons a single project reduces emissions. Nonetheless, measuring national annual emissions is far easier than measuring the amount by which a particular project reduced greenhouse gas (GHG) emissions. The reason is that in the first case we do not need to create a hypothetical scenario of what would have happened had something not occurred. None of the complications introduced because we must establish a hypothetical baseline to measure “additionality” and control for “leakage” when awarding emission reduction credits to a single project raise their ugly heads when we measure annual national emissions. But all these problems immediately arise as soon as we try to measure how many fewer tons were emitted because an applicant for certified credits undertook a particular project.
Measuring national emissions: How will the Kyoto treaty managers measure national GHG emissions in 2012? Many people will be surprised to learn that the treaty staff will not attempt to measure the amount of different GHGs coming out of all the smokestacks, automobile exhaust pipes, and cows in a country. As a result, there will be very few, if any on-site inspections.1 Instead, treaty staff will estimate national carbon emissions based on statistics already supplied by governments to the United Nations about (1) the goods and services produced by their various industries and agriculture during 2012, (2) the predominant technologies used in those productive sectors in 2012, and, most importantly, (3) the amount of fossil fuels consumed by their energy and transportation sectors in 2012. Since burning or cutting down forests also releases carbon, additional information about deforestation during 2012 may also be collected from governments, although satellite photos are more likely to be relied on. Will the resulting estimates of national emissions in 2012 be perfect? No, they will not. But just as the equally imperfect estimates of national emissions in 1990 they will be compared to were agreed on with very little squabbling when countries ratified Kyoto, the estimates for 2012 will be agreed on with very little squabbling between treaty staff and national governments. In other words, the estimates of national emissions in 2012 will allow very little opportunity for governments to challenge rulings. The estimates will be good enough to determine if governments of Annex-1 countries lived up to their treaty obligations, and even good enough to determine how much countries fell short of meeting their caps for purposes of assessing fines or penalties.
Interestingly, it would be even easier to measure the amount of carbon sequestered during 2012 in the national territory of each country—although the staff will not perform this calculation since Kyoto does not award credit for preserving existing sinks. Thanks to the system of global satellites already in place, every square inch of planet Earth can be monitored from the sky to see what is located there. Thanks to global biological mapping, we know what flora is on all that land, and thanks to global temperature and rainfall records, we know how much carbon the particular flora on all that land sequestered during the year given temperature and humidity conditions. This means that not only is measuring annual carbon emissions for a country relatively straightforward, but measuring annual net carbon emissions for a country (i.e., annual carbon emissions minus annual carbon sequestration) is equally straightforward.
Measuring emission reductions for projects: On the other hand, how does the Kyoto staff decide how many credits to certify for a project that applies for certified emission reduction credits (CERs)? As explained in Chapter 8, certification is done through the CDM, and it is the CDM executive board that is the final arbiter. The CDM has its own professional staff, but relies on designated national authorities and designated operational entities to evaluate project design documents. The CDM executive board is supposed to grant CERs only if (1) the project would not have taken place in any case (i.e., the project was not part of business as usual); (2) the project created a real reduction in GHG emissions that is “additional” (i.e., above and beyond what would have occurred had the project not taken place at all); and (3) the project does not create “leakage” (i.e., the project does not cause an increase in emissions elsewhere in the country that would not have occurred had the project not happened).
Determining (1) requires guessing what the applicant would have done without the incentive of being able to sell emission credits. Only if the project would not have occurred in a business-as-usual scenario is it supposed to be awarded credits. Determining (2) and (3) both require establishing a hypothetical baseline, a scenario of what would have happened had the project never occurred. Does this sound complicated? Yes, it is. Difficult? Yes, it is. Does it require difficult judgment calls? Yes, it does. Does it sound like whatever decision the executive board makes could easily be questioned and challenged? You bet!
As if all these problems were not enough, a further difficulty those who must decide how many CER credits to award particular projects must face, but those measuring annual net national emissions do not face, is timing and permanence. This problem can be particularly troubling when awarding credits for sequestration services that continue over a number of years and may or may not be guaranteed permanently. Projects often change emissions and sequestration for many years, and while it does not matter where changes in net carbon emissions occur, it does matter when they occur, and it matters whether or not the changes are permanent. The earlier reductions in net emission take place, the more valuable they are in averting climate change. And, obviously, a permanent reduction in net emissions is far more valuable than a reduction that is only temporary.
Now that we are clear that measuring annual national emissions is different—and easier—than measuring how much a particular project reduces emissions above and beyond what would have occurred in any case, we are ready to render a definitive judgment with regard to various criticisms of carbon trading under the Kyoto Protocol. First we review the prima facie case for carbon trading as “savior” that promotes greater efficiency and equity. Then we consider the case against carbon trading as a “scam” that undermines efforts to reduce global emissions, creates inefficiencies, and aggravates global injustice.
The efficiency case for international carbon trading: Empirical studies estimate large differences in the costs of reducing carbon emissions from sources in different countries, in which case prohibiting trading significantly inflates the overall cost of achieving global reductions.
Minimizing reduction costs should take a back seat to more important issues—namely, will the policy reduce emissions sufficiently to prevent climate change, and will the policy distribute the costs of doing so fairly? However, while efficiency may be secondary, this does not mean it does not play an important role in averting climate change. Reducing carbon emissions will increase costs for corporations—which is why corporations routinely lobby to minimize the size of mandated reductions. But reducing emissions also imposes costs on society as a whole. The easiest way to understand why reducing emissions impose costs on people other than corporations is to remember that corporations always try to pass on higher costs to their customers in the form of higher prices, and whenever demand is not infinitely elastic they are able to do so, at least in part. More generally, there are significant social costs associated with reducing carbon emissions. Going without bread or milk for two days until next week’s shopping trip because gas prices have gone up is a minor inconvenience. Replacing your old furnace, washing machine, or clothes drier with new, energy-efficient home appliances can cost thousands of dollars. A Toyota Prius costs considerably more than a Ford Focus because building a hybrid engine that gets fifty miles per gallon costs more right now than building a traditional engine that gets twenty-five.
Some environmentalists deny this fact and claim there are no social costs associated with moving from a fossil-fuel-based economy to an economy based on renewable energy sources. Unfortunately, ignoring transition costs does not eliminate transition costs, which are, in fact, significant. Moreover, ignoring transition costs leads people to be oblivious to the importance of devising a conversion plan to share the transition costs equitably. Of course, fossil fuel and corporate lobbies greatly exaggerate the transition costs in their attempt to frighten the public and forestall action to avert climate change. An excellent study released in October 2009 by Economics for Equity and the Environment demonstrates that the transition costs, while real, are much less than fearmongers suggest and that stabilizing GHG concentrations at 350 parts per million would be a very inexpensive insurance policy for our species and the planet (Ackerman et al. 2009b).
Of course, the real social benefits of reducing emissions will come in the form of damage avoided because climate change is averted. These real benefits are much greater than the true social costs incurred in doing so—which is why it is efficient to reduce emissions and terribly inefficient to continue to fail to do so. But in the short run, while we are still developing new technologies and ways to produce and consume without burning large quantities of fossil fuels, it is foolish to deny there are social costs associated with reducing emissions. In the short run, it will cost more to transport ourselves, more to heat and cool our homes and businesses, and more to produce everything that requires energy, including much of our food, once we put a price on carbon.
Besides avoiding wastefulness, the best reason to search for policies that minimize these social costs is that, the lower the cost, the greater reductions we can make and the sooner we can make them. This is why anyone interested in hastening and increasing abatement—which is anyone seriously concerned about climate change—should be very much in favor of making sure abatement is done efficiently. Yes, corporations lobby for cost efficiency in order to save themselves money. But just because progressives do not give priority to saving corporations money does not mean we should not support efficient abatement.
The equity case for international carbon trading: Since some climate justice activists are among the most outspoken critics of international carbon trading, it may come as a surprise that the strongest argument for international carbon trading is that it acts to reduce international economic injustice. Under Kyoto only MDCs have mandatory caps, which means that only MDCs are compelled to bear any of the costs of averting climate change. If MDCs were forced to make all their reductions domestically, this would cost them more than when they can buy some of their reductions from sources in LDCs for less than it would cost them to make those reductions themselves—which is why sources in MDCs who will have to make reductions lobbied for this option. But whether it costs them more or less, it is sources in MDCs who bear all the costs of averting climate change under Kyoto.
Without trading, not only would the costs to MDCs be higher, but also LDCs would have no opportunity to gain financially from trading. Of course, LDCs and MDCs alike benefit from averting climate change with or without trading, but without trading LDCs would enjoy no additional financial benefits from Kyoto. However, when sources in LDCs are allowed to sell credits to sources in MDCs, not only do LDCs benefit from averting climate change while bearing none of the costs of doing so, but LDCs also enjoy a substantial financial gain because they only sell credits when the price they get for a CER is higher than their cost to produce the reduction.
The economics is simple: Since many of the cheapest abatement opportunities are located in LDCs, there is an efficiency gain from reducing emissions there rather than in MDCs. When a source in an MDC responsible for a reduction buys a CER from a source in an LDC, the seller and buyer share the efficiency gain. The higher the price paid for the CER, the more of the efficiency gain from locating the reduction where it is cheaper is captured by the seller in the LDC. The lower the price of the CER, the more of the efficiency gain is captured by the buyer in the MDC.
But if international trade and capital liberalization aggravate global inequalities, why would international carbon trading do the opposite? This question deserves a serious answer. When there are differences in the opportunity costs of producing goods in MDCs and LDCs, there are potential efficiency gains from specialization and trade. The terms of trade divide the efficiency gain between the countries. When loans lead to larger increases in productivity in LDCs than MDCs, international lending yields an efficiency gain. The interest rate on international loans divides the efficiency gain between LDC borrowers and MDC lenders. However, the problem in the case of international trade and investment is that as long as capital is scarce globally, the interest rates and terms of trade that the laws of supply and demand generate predictably distribute the lion’s share of the efficiency gains from international trade and investment to the MDCs, thereby widening the gap between the haves and have-nots. Moreover, empirical evidence about the effects of the expansion of free-market trade and international finance on global inequality over the past thirty years strongly supports what theory predicts: Expansion of free-market international trade and investment systematically aggravates global inequalities and inequities (Hahnel 2005b). But in the case of carbon trading the situation is different.
Kyoto forces MDCs to bear the entire cost of averting climate change by imposing caps only on MDCs. In this context, when carbon trading shares the efficiency gain from locating reductions where they are cheaper between sellers and buyers of CERs, the result is that part of the reduction in costs to MDCs is transferred to LDCs as a pure financial gain. Under Kyoto, LDCs get the benefit of averting climate change at no cost to them with or without carbon trading. Without carbon trading, that is all they get. But with carbon trading, LDCs get an additional financial gain from capturing part of the reduction in costs to MDCs that carbon trading creates. When LDCs and MDCs sit down to play the game of divide the efficiency gain from carbon trading between them, under Kyoto the MDCs have already put up all the chips they are playing for! Even if MDCs recapture most of their chips, any MDC chips that LDCs capture when they sell CERs simply puts them that much farther ahead than they would have been had they never had the opportunity to sit down at the carbon market gaming table and play with what is in effect “house money” provided by the MDCs.
In sum, the case for international carbon trading on efficiency grounds is that international carbon trading lowers global reduction costs. This not only reduces the human costs of averting climate change, but also makes it easier to lower MDC caps on emissions even further. The case for embracing carbon trading on equity grounds is that as long as MDCs have tighter caps than LDCs, carbon trading generates a significant flow of income from more to less developed countries that would not occur otherwise.
What arguments do critics offer against international carbon trading? Which arguments hold no water? Which arguments make valid points because of flaws in the Kyoto Protocol that could be corrected in a post-Kyoto treaty?
We have already reviewed a number of common criticisms. Some people argue that like most international trading of one kind or another, carbon trading will aggravate global inequalities. As just explained, while this criticism is compelling on both theoretical and empirical grounds with regard to international trade and investment under free-market conditions, it is not compelling in the case of international carbon trading provided national caps are set equitably. This is even true if MDC buyers prove to be sharpsters who recapture the lion’s share of the efficiency gain from locating reductions where they are cheaper in LDCs.
Others claim that when CERs are bought in lieu of reductions in emissions by sources in MDCs, this punctures holes in the global cap on carbon. This criticism circulates so widely in some progressive environmental circles that it is often taken to be an uncontested “fact.” This criticism was analyzed at great length in Chapter 8, where we arrived at the following conclusions: (1) Carbon trading cannot puncture holes in the global cap on emissions as long as the source selling the CER is located in a country with a cap. (2) Even if the source selling the CER is located in a country without a cap, as long as the CER is properly evaluated it does not puncture a hole in the global cap on emissions. (3) Only when the CDM executive board awards illegitimate credits for projects in countries without caps are holes punctured in the cap on aggregate emissions from all Annex-1 countries and the effectiveness of the treaty weakened.
Still other critics warn that if we turn emission rights into a commodity, Wall Street will integrate CERs into its next toxic, financial cocktail, leading to yet another financial crisis. As explained in Chapter 7, if international finance is not subjected to effective regulation we will in all likelihood suffer another financial crisis. But this will occur whether or not CERs are an ingredient in the recipe for toxic assets. However, if the international financial system is tamed by prudent and competent regulations, CERs should pose no danger in this regard. However, there are other objections people have raised to carbon trading still to consider.
Not all emissions are equivalent: One argument against carbon trading reduces to the claim that not all emissions are equivalent and trading non-equivalent reductions is problematic. While this argument is valid for many pollutants, it does not apply in the case of carbon dioxide. To paraphrase Gertrude Stein, “a ton of carbon is a ton of carbon is a ton of carbon.” For many pollutants, how much damage is caused and who suffers the damage depends on where the source is located. What environmental economists refer to as hot spots can occur whenever pollutants are not uniform—that is, when effects differ depending on the source, as is generally the case when the damage caused by an emission is greater closer to the source. But carbon dioxide is a perfect textbook case of a uniform pollutant: it makes no difference whether a ton of carbon is emitted by automobiles driving on the streets of Chicago or by a power plant on the outskirts of Beijing, because the damage is the same whenever a ton of carbon reaches any part of the upper atmosphere surrounding Earth. In other words, it makes no difference where we reduce carbon emissions as far as the damage they cause is concerned, which means our only concerns should be (1) how much it costs to reduce emissions from different sources, and (2) who pays for those costs. The “trade” part of a cap-and-trade policy for carbon emissions works to allocate the reductions to wherever they cost the least. What many critics of carbon trading fail to understand is that who pays for reductions can be determined independently from where the reductions occur.
Many critics also object to trading emissions reductions for increases in sequestration (taking carbon out of the atmosphere), arguing that the two are not equivalent. But this is also not true in the case of carbon dioxide, the major GHG. Increases in the concentration of GHGs in the atmosphere cause climate change. It is the carbon cycle—where natural processes emit carbon dioxide and other natural processes sequester carbon dioxide—which human activity has pushed dangerously out of balance. And it is balance in the carbon cycle we must restore. Since taking one ton of carbon out of the atmosphere reduces concentration levels by exactly the same amount as reducing carbon emissions by one ton, the two are completely equivalent, which means that science tells us it is net emissions, not emissions, which matters. Since there is no difference in benefits from reducing emissions and increasing sequestration, our only concerns should be what they cost and who pays. And again, trading can lowers costs, and who pays those costs can be determined independently from where emissions or sequestration occurs. Think of it this way: If one is willing to pay a certain amount to reduce a ton of carbon emissions this year, one should also be willing to pay the same amount—neither a penny more nor less—to increase sequestration of a ton of carbon this year. There is no more reason to ban trading sequestration increases for emissions reductions than there is to ban trading of carbon emission reductions that occur in different places.2
Carbon trading reduces pressure on MDCs to undergo necessary changes: Many people see carbon trading as a loophole permitting the MDCs to weasel out of making necessary adjustments to their carbon-guzzling domestic economies and unsustainable lifestyles. These critics argue that we need to put maximum pressure on MDCs—where carbon emissions per capita are highest and therefore conversion to carbon neutrality is most urgent—to replace fossil fuels with renewables and develop new energy-saving habits of consumption. They argue that preventing MDCs from trading increases pressure on them to change, whereas allowing them to buy foreign credits enables them to postpone necessary domestic transformations.
It is true that we want to put maximum pressure on the advanced economies to change their unsustainable economic way of life. It is true that climate change will not be averted unless energy, transportation, agricultural, and industrial sectors in MDCs are completely transformed and consumption patterns become far more energy-efficient. It is true that the sooner these monumental tasks are tackled by MDCs, the better our chances of avoiding catastrophic climate change will be. And it is also true that Kyoto has failed to launch the advanced economies on this path. But banning carbon trading is not the right way to pressure MDCs to transform their unsustainable economies. The way to increase the pressure is to lower their caps, not to make it unnecessarily difficult for them to meet their caps—which is what banning trading does.
The Appendix to Part IV on climate control treaties illustrates why applying more pressure on MDCs by lowering their caps is preferable to applying more pressure by banning trading. In the appendix the marginal cost of reductions in MDCs is the same in Treaty #5 as it is in Treaty #3; in other words, the pressure on MDCs to change their habits is equal in both cases. However, because Treaty #5 allows trading through a CDM while Treaty #3 does not, Treaty #5 produces a much greater global reduction in emissions for the same amount of “pain.” In other words, Treaty #5 is much more effective at preventing climate change. In the end, MDC governments will have to regulate, tax, or cap carbon emissions—as well as spend massive sums on economic conversion. The way to force them to launch an all-out “Green New Deal” is to lower their national caps dramatically in the international treaty that will follow Kyoto in 2012, while simultaneously making it as cheap as possible for them to meet lower caps by allowing full carbon trading. Moreover, since trading makes reductions easier, it increases the likelihood of winning the crucial political battles that lie ahead to lower caps even more than what can be won today.
We should not settle for less reduction than we could get for a given level of pain. Of course, those of us who are convinced that the danger of climate change is much greater than many yet realize should do our best to convince the public to tolerate the highest pain threshold we can get it to agree to. But having gotten agreement to tolerate as much pain as we can, we should then set caps as low as that pain threshold permits and get the highest emission reduction that level of pain can achieve. We do that by allowing international carbon trading. Restricting or banning trading is wasting pain by getting less reduction for the pain than we could have.
Another way to see it is this: Why should we prevent fruit growers from picking low-hanging fruit when it is available and instead force them to pass over low-hanging fruit and pick fruit from higher branches? If we want to force fruit growers to pick both the low-hanging and the high-hanging fruit, we can accomplish this goal by increasing the amount of fruit we require them to pick. But no useful purpose is served by forcing fruit growers to pass over low-hanging fruit and pick fruit from higher branches instead. If we want to force fossil-fuel-burning utilities in MDCs to undergo major, costly conversions, the way to do this is to lower the emission caps on MDC countries so they will have to not only buy the cheaper allowances but also undertake more costly conversions of their own plants.
Carbon trading will impoverish LDCs in the future: This argument takes two forms. Some critics worry that if LDC sources are allowed to sell offsets to MDCs now, when offset prices are low, then twenty years from now LDCs will have used up all their cheap ways to reduce emissions and they will be stuck with expensive ways when they are finally required to reduce their emissions by an international treaty. This argument is unpersuasive. If this conjecture about the trajectory of prices for offsets is correct, all LDC governments have to do to avoid the unfortunate fate projected for them is not sell offsets now if prices are low, wait for offset prices to rise, and then either sell offsets later at higher prices or use their cheap means of reducing emissions to meet their own emission reduction requirements later. This argument for banning or limiting the sale of CERs by LDCs is nothing more than paternalism, pure and simple. “We” should bar LDCs from managing their new wealth—which is what lenient national caps combined with many cheap opportunities to reduce carbon emissions amounts to—because “we” think they will foolishly screw themselves by misjudging price trajectories that someone else miraculously guesses correctly?
Others argue that the problem is not that LDC governments are stupid, but that they are at the service of domestic elites and will use income from CER sales not to benefit the poor and finance development but to further the elites’ lavish lifestyles. But, if this is true, it implies—quite conveniently—that there is never any reason to reallocate wealth or income from MDCs to LDCs since any transfers would presumably be misappropriated by LDC elites. This argument suggests that winning fairer terms of trade or reparation payments for climate injustice is as pointless as securing a steady flow of revenue from MDCs to LDCs through sales of CERs.
REDD dispossesses indigenous communities: Critics have attacked a new feature of Kyoto called Reducing Emissions from Deforestation and Degradation (REDD) because they claim it dispossesses indigenous peoples and forest communities. The need to provide positive incentives to protect forests was first raised by the Coalition of Rainforest Nations in 2005 at COP 11. It gained more political traction when new estimates indicated that carbon emissions from deforestation and forest degradation account for 20 to 25 percent of global emissions, which is more than the emissions caused by the entire global transportation industry. The REDD proposal was hammered out at COP 13 in Bali in 2007, to be put to a vote at COP 15 in Copenhagen.
REDD is an attempt to correct for a perverse incentive Kyoto created to destroy existing forests innon-Annex-1 countries. Because national emissions are not capped in non-Annex-1 countries, and because there is no payment for ongoing carbon storage and sequestration services, Kyoto provides no incentive to protect forests from being burned off to create pastureland for cattle or from being cut down to be sold as timber even though deforestation releases large amounts of carbon. On the other hand, the CDM creates a positive incentive to plant trees after deforestation to sell as sequestration offsets since these projects can demonstrate additional sequestration and thereby qualify for certification. The temptation to destroy forests for commercial benefit and then replant in order to sell sequestration offsets is perverse because even if we ignore innumerable other valuable environmental services standing forests provide, such as species preservation, soil conservation, and water cleansing, the release of carbon from destroying existing forests in the present does far more to accelerate climate change than the additional sequestration from newly planted trees does to avert climate change in the future.
REDD was designed to eliminate this perverse incentive by awarding credits for preserving threatened forests. Of course, determining if a forest is threatened requires establishing a business-as-usual baseline, which, as we have seen, is not easy. And capping emissions in non-Annex-1 countries would have been a simpler way to discourage deforestation since it would have penalized carbon emissions that result from deforestation. Nonetheless, for the first time, REDD made protecting existing forests in LDCs financially valuable and thereby made control over existing forests more valuable than before. And that is the catch, according to climate justice critics: REDD gave global corporations and landed aristocracies an incentive to dispossess forest people and grab land titles even if they did not want to search for minerals or oil, burn the forest to make pastureland, or log it off for timber sales.
Historically, when oil or minerals are discovered on native lands, dispossession has often been the result. And even when native people retain possession of their lands, traditional ways of life are often destroyed by the activity necessary to reap financial rewards from new resource extraction opportunities. By design, REDD does make forests inhabited by indigenous peoples more valuable. But in this case, if forest dwellers can retain possession of their lands, they can reap financial rewards without destroying the forests and upsetting their traditional ways of life in any way. REDD rewards forest people financially for maintaining their traditional ways of life. All they have to do is avoid expulsion by global sharpsters. Perhaps climate justice activists and advocates for the rights and well-being of indigenous people should concentrate their efforts on helping forest dwellers keep their lands instead of denouncing a program willing to pay them considerable amounts for continuing to live exactly as they prefer.
The truth is that we still do not know how much carbon trading will be permitted under the Kyoto Protocol because the day of reckoning has yet to arrive and because even after lengthy negotiations at COP meetings in Marrakesh and Bali following Kyoto, COP 15 in Copenhagen failed to reach a final resolution of all outstanding issues regarding what will and will not be counted. So how carbon trading will actually be treated under Kyoto in 2012 remains a moving target.
To the extent that trading fails to relocate reductions to where they are least costly, there is an efficiency loss. This could be due to restrictions on emissions trading that prevent efficiency-enhancing trades from taking place. Or it could be due to trading bogus credits that locate reductions where they are actually more expensive. One thing is clear at this point. There will be some loss of efficiency under Kyoto due to both problems.
Neither those who want many more projects approved through the CDM nor those who want the CDM to tighten up on its criteria for awarding credits are having it all their way. The environmental community, focusing on projects that have been approved but should not have been, wants the CDM executive board to tighten its certification process. Sources wishing to sell or buy credits, and governments supporting those sources, complain of delays, pointing out that the pipeline waiting to be evaluated by the CDM keeps getting longer and longer. There is now strong support for replacing approval on a project-by-project basis with approval for large numbers of projects that host governments would propose as a package deal. As discussed in Chapter 8, when the CDM gives credits for bogus projects or awards more credits than it should, this punctures holes in the global cap. It also disrupts an efficient pattern of allocating reductions globally. On the other hand, when fear of making mistakes leads the CDM to reject valid projects or causes the pipeline of applications to get longer and longer, this is inefficient as well. And whatever else they may accomplish, restrictions on trading between Annex-1 countries and sources located within non-Annex-1 countries raise the global cost of achieving reductions. In Chapter 10, changes to avoid these problems in a post-Kyoto treaty are proposed and discussed.
Of course, some people consider the Kyoto treaty unfair simply because it would require the United States to cut emissions by 7 percent while it does not require China to cut emissions at all for the time being. But this notion of fairness implicitly presumes that all countries should share the costs of averting climate change equally. This view either ignores the facts that not all countries contributed equally to causing the problem and not all countries are equally capable of contributing to solving the problem, or else this kind of thinking denies that differential responsibilities and capabilities are relevant to how the costs of averting climate change should be distributed. But unlike the U.S. Senate and President Obama, whose behavior in Copenhagen implicitly denied that any such differences deserve to be considered, progressives—like the delegations from the 160 countries that signed the UNFCCC in Kyoto—do understand that differential responsibility and capability must be taken into account in a fair solution to the problem of climate change.
There are many progressives, and even more people from the third world, who say that the best part of the Kyoto Protocol was that it did more than pay the usual lip service to international economic justice when dealing with climate change. Because it treats MDCs—who bear the major responsibility for having overstocked the atmosphere with GHGs and who are wealthy enough to bear the costs of fixing a problem they created—differently than it treats LDCs—who did little to cause the problem and have less means available to them to help solve it—many progressives and third world residents consider Kyoto to be exemplary. However, although incorporating the principle of common but differential responsibilities and capabilities into the core structure of the treaty through the distinction between Annex-1 and non-Annex-1 countries was a powerful commitment to international climate justice, it may not have been the fairest way to implement the principle.
In Chapter 10, an alternative approach pioneered by the authors of the Greenhouse Development Rights framework will be explored, and changes based on that framework will be proposed to make a post-Kyoto treaty even more consistent with international climate justice. Suffice it to say for now that just as it would be unfair to treat the United States and China equally when per capita cumulative emissions since 1990 in the United States were seven times more than in China, and per capita GDP in the United States is six times more than in China, it is also unfair to treat China and the Democratic Republic of the Congo equally when per capita cumulative emissions since 1990 in China were fifty times more than in the Congo, and per capita GDP in China is nine times more than in the Congo. Yet this is what Kyoto does by classifying China and the Republic of the Congo both as non-Annex-1 countries.
There is very little space devoted to enforcement in treaty documents, and discussion of how enforcement will be carried out at COP meetings has been most notable by its absence. The Kyoto treaty states that countries that exceed their caps will be required to make up the difference plus an additional 30 percent penalty and will also be suspended from making transfers under emissions trading programs. But as we approach the witching hour, emissions in many countries have increased to the point where there is no chance they will be able to meet their Kyoto cap by 2012, and it is increasingly apparent that nobody believes Kyoto will be enforced. In which case, if I have refused to pay my bill and have no intention of doing so, adding a penalty of 30 percent will not accomplish much.
While many other issues have been the subjects of heated debates at COP meetings since Kyoto, enforcement has all the markings of the proverbial elephant that is invisible to everyone sitting with it in the room. Yet without a credible answer to how an international climate treaty will enforce negative consequences on violators, one could argue that the treaty, and all the debate that surrounds it, is little more than a tale “full of sound and fury, signifying nothing.” In the absence of a world government, all international treaties face similar problems. There are no easy answers to how to deal with recalcitrant violators. However, Kyoto is not the first international treaty to confront these admittedly difficult problems, and there are ways to increase the cost to countries that do not live up to their treaty commitments. One can make a strong case that too little attention has been devoted to how Kyoto will solve enforcement problems compared to all the attention devoted to other issues. In any case, ways to solve what is admittedly a difficult problem in a post-Kyoto treaty are discussed in Chapter 10.
1. Why the Chinese delegation in Copenhagen insisted that China would not tolerate on-site inspections and why anyone else cared one way or the other is a mystery that has led to much speculation and finger-pointing. Maybe it was a calculated ploy on China’s part to sabotage negotiations. Or perhaps the United States and the United Kingdom chose to overreact to a threat they knew to be meaningless in order to blame China for the breakdown in negotiations. Both explanations may even be true. Whatever the reasons, it is a reminder that for all the careful planning, positioning, and strategizing that negotiating teams engage in, in the heat of the moment negotiators can be clueless.
2. As discussed above, while increasing sequestration by a ton is obviously equivalent to reducing emissions by a ton since both decrease atmospheric concentration by one ton, important issues of permanence and timing must be considered when trading sequestration for emissions reduction. If an emission reduction is permanent while an increase in sequestration is only temporary, they are clearly not equivalent. Also, if the entire emission reduction occurs now while the bulk of the sequestration increase occurs later, they are not equivalent because reducing atmospheric concentration levels now reduces the likelihood of climate change more than equal reductions that occur later. However, this does not mean that trading sequestration offsets is impossible. It simply means that more care must be taken in determining what increases in sequestration are equivalent to a decrease in emissions. For an excellent example of how to go about comparing sequestration increases in Philippine forests with emission reductions in MDCs, see Sheeran (2006).