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

Last Updated: Sunday 07 June 2015 | 21:11:47 PM

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.


-- Six months after the Kyoto meet, governments convened again to deliberate climate-change affairs. The United States led an attempt to set up a free market trading system which would enable the us to do zero at home and allow other developed countries to meet their emissions reduction commitments by paying off nations like Russia which emit less. The message was clear. Put very simply, the rich countries still wish to keep on polluting. As cheaply as possible.

The two subsidiary bodies of the Framework Convention on Climate Change -- the Subsidiary Body for Implementation (sbi) and the Subsidiary Body for Scientific and Technical Advice (sbsta) -- met in Bonn. The joint meeting of these bodies was held to lay the ground for decisions to be taken at the forthcoming Fourth Conference of the Parties (cop-4) scheduled for November this year in Argentina. By May, 39 parties had signed the Kyoto Protocol, those emitting 39 per cent of all industrialised countries' emissions. Far short of what the protocol requires to come into force. (This needs parties which represent at least 55 per cent of the total carbon dioxide emissions. The us and Russia together account for 54 per cent and the protocol cannot go into force unless the two put pen to paper.)

The political agenda
At cop-1, the Ad Hoc Group on Article 13 known as ag 13 was set up to consider the establishment of a multilateral consultative process (mcp) for parties to resolve questions on implementation. At its fifth session in July 1997, ag 13 agreed that the mcp would be an advisory body rather than a supervisory body and that ag 13 should finalise its recommendations by the time of cop-4. But by the time of the Bonn meeting the negotiating text for the mcp remained heavily bracketed (un parlance for negotiating text that is not agreed between parties). It was decided in Bonn to set up a drafting group, chaired by Clara Musendo from Zimbabwe, to incorporate new proposals. Discussions centred around the mcp and its 'constitution.'

There was a sharp division on the exact size of the mcp . The eu and us favoured up to 15 members for "administrative efficiency", the g-77 and China wanted 25 members for "a broader competence base". The constitution was also a tricky issue. And while it was agreed to accept the text on the need for "equitable geographical distribution" between regions, the us had an innovative definition for equity. The us proposed dividing the membership equally between Annex 1 parties (industrialised countries) and non-Annex 1 parties. The us argued that as the mcp committee was the first under the convention, it was not compelled to adopt the un system of apportionment and could frame its own rules. g-77 and China disagreed on the need to rewrite rules for participation. And on June 9, a small group was convened to resolve these two outstanding issues. Finally it was agreed to disagree. The text remains bracketed and will be deliberated at cop-4.

But interestingly, it has been agreed that this intergovernmental body will include independent experts, albeit only those nominated by their own governments. At Bonn, the issue of 'transparency' was also deliberated. But the governments decided that too much openness is not the order of the day.

Flex Mex
The Kyoto Protocol includes three specific mechanisms (also flexibility mechanisms) Joint Implementation (Article 6) cdm (Article 12), and Emissions Trading (Article 17) -- with the explicit aim of "assisting" the industrialised countries to meet their targets. Governments now have to finalise the rules for trading. This joint meeting was designed to "identify preparatory work needed on these rules and to reach agreement on a work schedule for the cop-4," as Bakary Kante, chair of the sbi stated.

There was a sense of desperation amongst the industrialised countries. The meeting in Bonn was full of business groups seeking to enter into deals as fast as possible.

The cheapest and most attractive option for meeting the emission targets of the North is the cdm that will be operated on a project basis in the South. In Bonn, the agenda was to rush through the rules and guidelines so that "real trading" could begin. The us delegate, at one time, even thumped on the table asking to be allowed "to move from paper to action."

There were and still remain differences between the two major negotiating blocks -- European Commission and the jusscannz group of countries (Japan, us , Switzerland, Canada, Australia, Norway and New Zealand, later joined by Iceland and Russia) -- on various rules and guidelines of these mechanisms (see box Trading air). But it was the third block, the Group of 77(g-77) and China's assertion on the need to examine the proposed work plan and methodological issues concerning mechanisms, which formed the basis of the chairman's report for this item.

At the very start of the meeting, it was decided to discuss "mechanisms" in a contact group chaired by Yvo de Boer from The Netherlands and Gylvan Meira Filho from Brazil. The group had to

identify issues related to the mechanisms,

consider a work programme and,

suggest decisions which needed to be taken.The co-chairs presented the group with the draft work programme and timetable. The g-77 and China formed their own group -- headed by an Indian negotiator -- which reworked the co-chair's proposal in their position paper on the mechanisms of the Kyoto Protocol. The group also presented its own paper, "Initial list of issues on mechanisms of the Kyoto Protocol."

Reconvening to discuss these two papers on June 10, the contact group saw sparks fly between the g-77 and China and the us .

On emissions trading, the g-77 and China have said that it was important to examine "how the emission rights and entitlements of developed country parties will be determined and created for trading emissions. Will this be consistent with the principle of equity keeping in view the historical and current responsibility of developed countries to climate change and the ultimate objective of the Convention?

The us delegation questioned the inclusion of language on rights and entitlements. g-77 and China commented that "rights" are included in the literature on domestic common property resource trading schemes such as "pollution rights". However, the eu and the us insisted that the entitlements for trading have already been established under the Kyoto Protocol. The us said that it is not "rights" but assigned amounts that are discussed in the protocol.

With no consensus possible, it was agreed that the Chairs would prepare a report taking into account all discussions in the contact group. The final document from this group was "a draft" of the conclusions made by the chairs to the joint sbi/sbsta which was compiled on the basis of the position paper prepared by the g-77 and China and included comments and additions received in the contact group from the other two negotiating blocks.

But this chairperson's draft does list the contentious methodological and technical issues which need to be studied on each mechanism. Included in the work programme for emissions trading (Article 17) is the need to examine the "basis of rights and entitlements of Annex 1 parties for trading emissions" and the "determination and creation of such rights and entitlements." But will the North respond to the concerns of g-77 and China? This remains to be seen.

Sinking feeling
The world's forests, soils, oceans and the troposphere are part of its natural sinks, which have the capacity to cleanse carbon dioxide and hence reduce global warming. The scientific methodology used to account for the sinks will be of importance to the countries that have an interest in national sinks that is countries with large land areas and forested areas and between those countries that do not. The two chief protagonists are the us with sink interests -- and the eu with limited sink interests. Understandably, since they have large land areas, Canada and Australia side with the us .

The Kyoto Protocol has already taken the step to make the national sink a resource with value. The Protocol says that industrialised countries, in order to meet their commitments can take into account changes in emissions resulting from "human induced land-use change and forestry activity since 1990. The Protocol also restricts the quantification of sinks to "forestry activity, limited to afforestation, reforestation and deforestation. Therefore, if any country has reduced its deforestation rates after 1990 it can take the benefit of 'net reduced' emissions in its balance sheet.

The us is also very keen to plant more trees this time in developing countries so that it can deduct each tree's fixed carbon from its own account. It therefore, wants forestry-related emission reduction projects under the cdm .

What has been agreed or not agreed upon in the Kyoto Protocol on this issue has become the most divisive issue for these two superblocks. The eu maintained that there are scientific uncertainties and wants the sbsta to call on the Intergovernmental Panel on Climate Change (ipcc) to address the outstanding issues in a special report. The us discounts the scientific issues and wants action fast. It argues that if this is not done, it will not be able to ratify the protocol.

The most critical issue would be the method of calculating the 'net' emission -- that is if the forest ecosystem has led to increased or decreased emissions in the atmosphere over its lifetime. Forests are both sinks and sources -- they absorb carbon dioxide during their growing period and emit it during deforestation. But calculating the net emission is more than an exercise in addition and subtraction. When trees die, the carbon sequestered over the years is transferred to the litter and soil and is also released to the atmosphere. But in case the tree has been used for products like furniture the carbon could be in the forest product. Therefore, some carbon is released immediately, but the other processes could take years. In addition, there is a fear that what is a sink, now, could become a source with global warming. It is now understood that organic carbon built up in forest soils over the centuries could be released as the temperature of the world increases.

In Bonn, the situation seemed to be in favour of the eu . The report the us was trying to rush through was deferred and despite budget cuts, parallel processes have been initiated to create shortcuts for it. It has been agreed that the secretariat will organise a workshop of experts with the ipcc prior to cop-4 to consider availability of data in relation to that part of the Protocol that relates to land use changes in forestry. And after cop-4, the sbsta will also plan a workshop on the additional human induced activities which affect climate; agricultural soils, land use and forestry. The ipcc has also been requested to prepare a special report on the "methodological, scientific and technical implications of the Protocol, with particular reference to sections dealing with emissions from land use changes and forestry. This report will be discussed only at cop/mop-1 the first meeting of the parties which is expected only after ratification of the Kyoto Protocol by the requisite number of countries.

But the NGOs monitoring these processes remain convinced that this parallel approach will mean that science will be out of step with politics. The us and Canada, for instance, have put forward the position that the workshop scheduled prior to cop-4 should elaborate the definitions of reforestation, deforestation and afforestation. The ngo s state that this would be counter productive as the ipcc would not have determined which activities are quantifiable, verifiable and transparent. "This is politics driving science," say these groups.

Tightening the noose
The stage has been set to tighten the noose on developing countries. The North insists that they also set emission reduction targets

The Framework Convention on Climate Change (fccc) stipulates that the second review of whether the commitments of industrialised countries are adequate or not, "should take place no later than December 31". Therefore, cop-4 will undertake this second review. The first review undertaken by cop-1 resulted in the Berlin mandate which then led to the Kyoto protocol. The Convention provides in Article 4 (d) that such reviews shall take place at regular intervals as determined by the cop , until the objective of the convention is met. As this provision is only for industrialised countries (Annex 1 countries) A desperate attempt to find a way to 'globalise' the commitment is being undertaken. Article 7.2 of the fccc that provides for the review of the implementation of the convention, uses the innocuous word "the parties" and not Annex 1 parties. Industrialised countries are interpreting this to mean "all parties" and that this article provides for non-Annex 1 (developing countries) to opt for targets. This is the stage on which the melodrama will be played out in Buenos Aires and both parties Annex 1 (industrialised) and non-Annex 1 (developing countries) are beginning to get into their act.

Industrialised countries see this as an important means to twist the arm of developing countries to agree on binding targets for limiting greenhouse gas emissions. Developing countries, on the other hand, stress that this is the review of the adequacy of Annex 1 party commitments and that clearly what was agreed upon in Kyoto was very small. One element of this melodrama is to provide for "voluntary commitments" -- to break the developing countries by getting a few to accept that they will "voluntarily" agree to binding targets. Argentina, host of cop-4, had submitted a written proposal to place such a commitment upon itself. This was to be discussed in the upcoming meeting. In the face of opposition from g-77 and China, it was dropped.

Even then it is widely speculated that this will mysteriously reappear at the top of cop-4's agenda and will be used by the North to bargain for concessions on the same issue.

In Bonn, act I of this drama was enacted with great gusto. The eu said it welcomed the need for " global participation " and was ready for discussions with "all " parties at cop-4 and beyond on the review of commitments. Australia, joined it to say that "scientific evidence indicates that actions by Annex 1 countries alone would be insufficient. On cue, the us , added that this was clearly due to the small number of parties involved. Responding to this, g-77 and China said that the second review by cop-4 must respect the fccc mandate and not be distracted by extraneous considerations of "new" commitments for developing countries. The us wanted a provision that would allow the "static" world order created by the Annex-1 list to be modified, keeping in view the newly industrialised countries. A contact group set up to handle the issue of new commitments met only to disagree on the following: whether new commitments by non-Annex 1 parties should be introduced; whether the review should consider action by all parties including developing countries as necessary to meet the objectives of the convention.

Or, whether this review should only be restricted to the review of commitments of industrialised countries.

Also whether the third review should be carried out at cop/mop-2 or be determined by the cop at its future sessions. This drama will now continue in Buenos Aires with the pressure on developing countries mounting on this issue.

What is interesting is the complete divorce of this political review process from the science of global change. The ipcc , Third Assessment Report (tar) is scheduled for release for 2000 or 2001. The first review of the Kyoto Protocol is expected at best around 2004-2005, which would be too late to link science with politics (see box: Political science).

In limbo?
At the closing of the meeting, the sbsta chair Kok Kee Chow from Malaysia, noted that this session had helped the world move forward on important issues. He urged delegates to "see the glass as half full rather than half empty." Therefore it would be right in a way to say that the meeting at Bonn did flag important issues and provided countries with an opportunity to size up the situation before they come to the negotiations in Argentina. But whether the prospects of climate change will bring this intensely unequal world together still remain to be seen. The World Cup certainly did.

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