Creative carbon accounting

The Kyoto protocol, agreed in December 1997, was the first step to curtail emissions of the industrialised world. It is now being used to set up a trading system to buy and sell carbon emissions. Anil Agarwal and Sunita Narain provide a review of Post-Kyoto movers and shakers, swaps and deals, and antagonists and protagonists

Published: Friday 31 July 1998

Creative carbon accounting

-- (Credit: Illustrations: Rustam Vania<sc) The Kyoto protocol -- to cut carbon emissions in industrialised countries -- is increasingly being understood not as an environmental agreement but a trading agreement. Speakers at a symposium recently organised by the World Trade Organisation noted that the Protocol could well be the most significant trading agreement of the century. Under this protocol, industrialised countries are expected to cut their overall carbon emissions by at least five per cent below 1990 levels in the commitment period, 2008 to 2012.

The industrialised countries and their private corpora-tions could invest in projects in developing countries which are carbon efficient. The net benefits of carbon reduction would accrue to the industrialised country or private corporation in its balance sheet of carbon accounting. Developing countries would be selling "certified emission reduction" units. To oversee this trading, a global Executive Board is proposed to be set up. The Board, in turn, will authorise numerous certification agencies that will assess the compliance of the country selling the emission reduction units.But the question of rights over the atmosphere remains unanswered.

It is because of this that the Kyoto Protocol is making multilateral institutions and banks scramble for a slice of the brokerage. The World Bank wants to corner the market with its Carbon Investment Fund; the Asian Development Bank, is developing a portfolio of projects of interest; United Nations Conference on Trade and Development (unctad) -- based in Geneva and a proponent of the tradable emissions scheme, would like to "manage" the emission trading corporation; the United Nations Environment Program (unep), with its new director, is looking for its role and contemplating an intergovernmental panel on emission trading. And the United Nations Development Program (undp), with its development focus, is positioning itself as the legitimate broker of the Clean Development Mechanism (cdm) (See box: Coming clean).

Therefore after the Kyoto meet, one thing is clear, climate change, has been taken out of the world of the environmental lobby to the big bad world of money. The key issue -- between the buyers and sellers of this commodity which has no clearly -defined borders -- is to trade without limits and without the interference of prickly issues of the property rights of the poor.

Playing baseline
Paradoxically, one of the most environmentally unfriendly decisions of Kyoto is the agreement to set a reduction target of five per cent by developed countries, of their 1990 level of emissions. This has set a precedent in target-manipulation that will only lead to more greenhouse gas emissions. In hindsight, Kyoto was a massive exercise in juggling books of rich countries' climate accounts. And what is most unfortunate is that it will now force each country to fiddle its own budget.

Take the case of Australia. In 1990, as much as 30 per cent of the country's emissions were from deforestation. Emissions which are still present in the atmosphere and are causing global warming. But instead of being penalised for creating the problem in the first place, Australia has been able to use its high emissions to its advantage by winning the right to count any improvement from this position as its national credit. And, as deforestation rate is already controlled, Australia can actually increase its emissions by eight per cent.

What then is the implication of the 'baseline' for the future? If this innovative climate accountancy is accepted as the method of calculating a nation's targets, then it would serve developing countries to actually increase their emissions as fast as possible. In fact, officials at the unctad, who are keen to work on a tradable emissions programme are even suggesting that the target set on the baseline can be viewed as a country's entitlement -- share of the atmosphere and that officials in developing countries should use this opportunity to increase their projected emission targets. They argue that the term 'assigned amounts' used in the Kyoto Protocol for the reduction target is actually the country's "assignment" of its entitlement over the atmosphere. Therefore, in order to maximise their assigned amounts, developing countries must start emitting more or at least projecting to emit more.

This precedent being set by the North is going to destroy, not save the climate.

Meaningless participation
In the post-Kyoto world one thing remains the same. According to us senators it will be countries like India, China and Mexico which will decide if the us will ratify the Kyoto Protocol. The us position has been carefully orchestrated to be dependent on the action of developing countries. In the pre-Kyoto days us industry launched an advertising blitz to convince the public that the result of a strong treaty on climate would be that on one hand, the prices of everything -- from oil to eggs -- would skyrocket and on the other hand, developing countries like India, China and South Korea will get a free ride for which us consumers foot the bill. Industry stressed it would lose its competitive advantage.

What is also evident now is that the us negotiating position is crafted on this basis. Its first step was to ask for something vague and undefined as "meaningful participation from developing countries" so that the ball would move to developing countries to say what they could do and of course, the us could easily dismiss it as "not meaningful enough".

Its second step was to get as good -- or weak -- an agreement as possible in Kyoto, make it clear it was a partial solution and not try for ratification immediately.

And its third step was or is to use the threat of non-ratification and opposition from the Senate unless there is "meaningful participation" from the developing countries. On December 8, 1997 vice president Al Gore told a press conference in Kyoto that "in order to sign an agreement, or in order to send an agreement to the Senate, we must have meaningful participation by key developing countries. Gore stressed again at the end of Kyoto, " let's be clear, we will not submit this agreement for ratification until key developing nations participate in this effort."

The pressure on the developing countries will therefore mount as the world's media will target their attention on their non-participation which will be seen as holding up ratification by the us . Everyone knows that without the us , the Kyoto protocol is meaningless. And every effort will be made to bind the "reluctant" developing countries in the interest of us all.

Price of change
The North feels that cdm is one way to buy the participation of the South. What would be the price of this participation? How much would the South be paid for its emission units? It is in the interest of the North is to buy these emissions as cheaply as possible. The us administration's calculations for its bill to meet the Kyoto commitments is "modest", according to its official position, simply because it plans to buy as much as 93 per cent of its emission units at the cheapest cost in the market place. The us proposes to pay as little as us $14-23 per tonne for its emissions credits.In contrast, the price the country would have to pay for domestic emission reduction programme would be us $125 per tonne.

The interest is to bargain for the "cheapest and most efficient deal". One approach to get the best deal is to develop a portfolio approach which drives each project to compete against the other. Effectively leaving the buyer to pick and choose and arm twist for the best option. The World Bank's Prototype Carbon Fund is one effort in this direction. The Bank has received funding from a number of utility companies and Scandinavian governments to start developing a portfolio of projects from the South.

Blowing hot in the US
In the us , domestic politics is gearing up for a round of shadow boxing before the world. No sooner does the us president flex his muscles on climate change -- which he called "the biggest challenge facing civilisation worldwide"-- than the powerful Congress slaps him across the wrist.

In April 1998, Clinton administration was to announce a us $6.3 billion five-year package of tax incentives and research to improve energy efficiency. But even before the package was announced senators had put spokes in the wheel of this grand design. In early May, Republican senators, John Ashcroft from Missouri and Joe Knollenberg from Michigan had introduced bills to block the administration from spending money on these programmes unless the senate ratified the agreement in Kyoto. Kollenberg, a bitter critic of the Kyoto protocol calls it "a terrible deal for the United States which the Senate would reject". He believes that the Kyoto protocol, which only requires the industrialised countries to cut emissions, will give the developing countries such as China and Mexico an unfair competitive edge.

In May, another global warming controversy was beginning as the White House was refusing to turn over information requested by the us House Oversight Panel which was beginning its hearings to consider the us commitment under the Kyoto treaty. On May 13, the panel heard Janet Yellen, chairperson of the White House's Council Economic Advisers, who testified that the administration's economic analysis found that the us would experience only a "modest"economic impact from meeting the protocol's obligations. However, the subcommittee remained unsatisfied with the numbers provided and on May 20, Republican Senator David McIntosh gave the administration the final ultimatum to turn over its economic analysis or face subpoenas.

In May 1998, president Clinton unveiled a new plan -- this time aimed at the household energy sector -- to cut energy use in us houses by 50 per cent by 2010 through better windows, insulation, energy saving applicances and more efficient heating and cooling systems. Under this plan, a collaborative research and implementation agenda was set up under the Partnership for Advancing Technology with us $70 million in the kitty. And while the Clinton administration continues to argue that emission trading and tax incentives will create new markets and export opportunities for the us , the Congress is adamanant: "There will be no implementation of the Kyoto protocol and no funds expended" says Republican Senator, Chuck Hagel.

The evolving framework
The current proponents of emission trading are very "simplistic" in their view of this system. All they say is needed first is a source of pollution which can be measured and monitored, and a market-place of polluters willing to accept and trade in permits. Second, what is needed, is to have legally binding targets. These were introduced for the first time in Kyoto. The stage is then set.

The only issues before this group of traders is: who should trade -- government or private parties? The us suggests that governments should be allowed to trade with each other. But then how will the system avoid what is known as "hot air trading" and ensure that all parties have sufficient incentives to reduce actual pollution? Adair Turner, director-general of the Confederation of British Industry, argues that "emission trading should only take place between companies and not between countries, and adjustments should automatically be made to a country's achieved levels when the intercompany trade is carried out."

Second, should the government charge for initial permits or issue them free to existing polluters? But this would restrict new entrants to the market once the allocation is complete.

The term, "hot air" is being furiously debated in this context. Some economists believe that "in the short term you may get a certain amount of hot air trading but in the long term, it has to be good for the environment".

But there are critics as well. Ambassador Raul Estrada-Oyuela, who chaired the Kyoto Conference of Parties, has said that emission trading will have to go, over a phase out period of eight years. "We want to make sure we are not creating a new crop for nations to sell." Estrada was responding to concerns expressed by developing countries that emission trading would create a market for cheap emission reduction options.

The most important issue -- allocation of rights to trade is completely negated in this debate.

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