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Number 663, 2002 by Josh Carter |
The Kyoto Protocol: Implications for Emissions Trading |
General Information Legal Cluster Bio-Geographic Cluster Trade Cluster Environment Cluster Other Clusters |
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Number 663, 2002 by Josh Carter |
The Kyoto Protocol: Implications for Emissions Trading |
General Information Legal Cluster Bio-Geographic Cluster Trade Cluster Environment Cluster Other Clusters |
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In historic negotiations in 2001, nearly every nation in the world agreed to the terms of the Kyoto Protocol with the goal of reducing the emission of greenhouse gases (GHG). The form of the agreement finally agreed upon by signatory nations included provisions for the creation of an emissions trading system. This idea attempts to assist countries in complying with the protocol by allowing them to "trade" excess pollution for emissions credits earned by nations that remain under their pollution caps. The complex nature of such a trading system, as well as its potentially effect on most of the nations of the world, points to several international legal and trade issues. The resolution of those issues as embodied in some future emissions trading system will determine -- in all likelihood -- whether or not the Kyoto Protocol successfully reduces GHG emissions.
The perceived need to reduce the world’s output of greenhouse gases (GHGs) motivated most of the world to create and sign the Kyoto Protocol. The agreement was designed to combat the problems of global warming, which, according to many scientists, threatened the world’s environment over the course of the next few hundred years.
Even as they signed this accord, however, many nations held reservations. The Kyoto Protocol required industrialized nations to make emissions reductions - steps that have economic consequences for people in each country involved. The goal of improving the world’s environment was thus weighed against the economic well-being of individuals, corporations and national economies. The United States refused to sign the treaty because of these concerns. Japan reluctantly joined the accord after it received some concessions that facilitate its ability to comply with treaty mandates.
Such assistance came as a way to balance competing environmental and economic interests. The Kyoto agreement contained a system of emissions trading. Some countries who signed the agreement were clearly more prepared to make emissions reductions than others. In theory, this creates the possibility for countries with painful economic adjustments to take advantage of favorable environmental movement in other parts of the world. If Japan perceived dangerous economic consequences of reducing its emissions too quickly, it could buy credits from those countries that easily remained underneath mandated emissions caps.
Though the principle is simple, the issue is complex. No international system can function without a basis in international law. The rules of any emissions trading system must be both clearly established and universally recognized. Additionally, a new system will have to be reconciled with existing international agreements regarding international trade. The legal and economic ramifications of Kyoto-inspired emissions trading will be both far reaching and significant. With so much of the world ready to establish an emissions market and with such perceived environmental problems at stake, it is clear that the way seemingly trivial points of international law and trade are interpreted will have a broad influence over the global environment. Some (but by no means all) of the major issues involved in the establishment of an international emissions trading system are discussed in the clusters below.
Josh Carter
June 2002
Signatory nations brought the Kyoto Protocol into force in 2001. The agreement included three sections concerning an emissions trading regime. Article 17 provides for trading of assigned amounts of emissions between industrialized countries (referred to as Annex B countries in the Kyoto text). Article 12 empowers industrialized countries to engage in emissions-reducing activities in developing countries, facilitating sustainable development in the process. Finally, Article 6, joint implementation, deals with the transfer of emission reduction units between nations ("Kyoto Protocol").
Though these three articles were included in the original agreement, they do not establish the formal guidelines for an emissions trading system. The Kyoto agreement foresees the development of such a system and has ensured that a future trading regime will be compatible with the original protocol, but it did not create a system on its own.
There are two types of disputes that could emerge under a global emissions trading system: verification and compliance.
Verification, both of the amount of emissions credits a country is entitled to, and of the amount of reduction a nation achieves, is a crucial part of any system. Only if all nations are confident that emissions are fairly and uniformly measured can there be a fair market in which emissions can be traded. UNCTAD has speculated about a two-level process: "Certification would be the first step towards creating a tradable credit. The certification process would occur whenever a Party not subject to an assigned amount wished to create a tradable credit. Its purpose would be to assure that a specific quantified reduction from a baseline could be expected from the credit-creating action. Verification, the second step, would provide assurance that the reductions actually occurred." In other words, before selling an emissions credit, a country would have to gain certification that it was capable of making enough of an emissions reduction to believe that the credit would actually be available and then allow its reductions to be verified after emissions reductions were completed (Tietenberg, et. al., 70).
The treaty must also guarantee compliance by all member nations. There is little reason to have a treaty if nations have no incentive to follow its mandates. In other words, to preclude cheating, the treaty must be enforceable. One of the most obvious examples of emissions trade cheating is referred to as "overselling" - - when a country sells allowances (emissions credits) that it does not have or that it needs to meet its own treaty obligations. There are two ways to combat this problem. "On the one side of the spectrum is an approach that would rely on an already contemplated compliance framework that would not impose up-front restrictions on emissions trading but would punish noncompliance with sanctions. On the other side of the spectrum is an approach that would not allow trading until after the deadline for meeting the emission limitation and reduction commitments and then would limit trades to allowances not needed to meet those commitments" (Nordhaus, et. al., 10837).
Unfortunately, both options have problems. There are two reasons why nations might end up overselling emissions credits. First, even though a country might wish to reduce emissions and expect to have credits to sell, it may be unable to administer those desired and anticipated reductions. Consequently, administrative inadequacies could result in a larger number of credits being sold than are actually available. Second, nations might willfully oversell, hoping to make money off of the emissions trading system while betting that the Kyoto-inspired trading regime will not be able to penalize such behavior (Nordhaus, et. al., 10841-10843).
Enforcing Kyoto’s mandates, particularly if there is any level of cheating involved, will probably end up causing international trade disputes at one time or another. Such trade disputes might be within the jurisdiction of the WTO, of which many treaty signatories are members.
An UNCTAD newsletter monitoring issues related to emissions trading succinctly summarized the problems international negotiators face when attempting to reconcile Kyoto Protocol provisions with existing WTO structures. For example, the principle of Most Favored Nation (MFN), a key part of the WTO, might be undermined under Kyoto if industrialized countries (appearing on the Annex B) list are not allowed to trade credits in the same ways as Annex I countries. The newsletter also cited potential problems for energy exporters whose products (like petroleum) might be denied into a country that lacked enough allowances to use the energy ("Global Greenhouse").
Thus, the Kyoto Protocol envisions an emissions-trading system but the lack of formal rules points to several potential legal problems. Actual emissions levels of each nation involved must be verified by the international community to determine the number of emissions credits available for trade. Each nation must then be willing to abide by the results of those verifications and not engage in "overselling." Otherwise, disputes will probably have to be dealt with by other international organizations, like the WTO, which may not resolve disputes with the same goals of global emissions reductions that the Kyoto Protocol possesses.
At the Bonn meeting in 2001, 178 nations endorsed the political agreement that finalized the Kyoto Protocol (only the United States objected). Before it can be brought into force, at least 55 countries, representing at least 55 percent of 1990 emissions levels must formally ratify the treaty. The country quota will be reached in mid-2002 when EU nations complete ratification. The emissions quota will require the ratifications of nearly all other signatories in the absence of U.S. support (Pomeroy and "Making Kyoto"). Presumably, most if not all signatory nations have interest in participating in an emissions trading market in one form or another. Decisions relating to emissions, then, will have a truly global effect if and when the Kyoto agreement comes into force.
Relevant International Organizations / Regimes
Any global emissions trading regime is still in its initial stages of development. UNCTAD research suggests that there might be several evolutionary phases. The first stage involves the development of domestic emissions markets in many nations (where emissions credits are traded between companies). This would be followed by a second stage where nations would mutually recognize the emissions credits and allowances of the other markets. A third and final stage would involve the establishment of a multilateral trading system, consistent with the mandates of the Kyoto Protocol (Aslam, et. al., 9-12).
Country-to-country levels of industrialization will have a dramatic effect
on future emissions trading. Nations with industrialized (or industrializing)
economies will have greater difficulty meeting their emisssions targets
than those without industries that release greenhouse gases. For more information,
see #19, Exporters and Importers.
Some parties to the Kyoto agreement are experimenting with their own domestic markets to facilitate trade in greenhouse gases. Denmark already has a functioning emissions market. (The United States, which has announced that it will not attempt to ratify the Kyoto Protocol, has the most experience with domestic emissions trading markets.) Others, like the United Kingdom, Argentina and Sweden are seriously considering the development of their own markets. These national markets might one day form the basis of a new international system of emissions trade (Aslam, et. al., 5). See section 8 for more information on the integration of domestic emissions markets.
There are currently several proposals for carbon emissions trading that might ultimately be adopted by Kyoto signatories; two broad conceptions of emissions credit generation have emerged.
First, nations could earn emissions credits by remaining underneath the pollution ceiling established by the Kyoto agreement. Kyoto requires signatory nations to make percentage reductions in their 1990 emissions levels. Since it is usually assumed that one metric ton of carbon dioxide emissions (CO2) is equal to one tradable emissions allowance, a country observed to be underneath its predetermined emissions cap would receive one emissions credit for each metric ton saved. A hypothetical example is in order. Assume that Country A emitted 100 million metric tons of (CO2) in 1990 and was expected to make a 10 percent reduction by year X. If Country A was able to reduce its emissions by 20 percent -- to 80 million metric tons -- it would be recognized for having met its emissions target and rewarded with 10 million emissions credits for its extra reductions. Those credits could then be sold on the international marketplace to nations that exceeded their pollution limits.
The resulting carbon commodity market would be responsible for establishing the monetary value of the credits. If several countries polluted excessively, emissions credits would be scarce, raising their value. In theory, then, nations that exceed their pollution limits would have a financial incentive to make emissions reductions, lest they be forced to buy expensive emissions credits (Nordhaus, et. al., 10839-10842).
Second, many nations have argued that they should be able to earn credits for environmentally friendly initiatives. If a country were to take positive steps to manage national forests or provide assistance to other nations to reduce their emissions, it seems logical that such a nation should be rewarded with emissions credits it could sell in the international marketplace.
This system, of course, has its problems. One, the Kyoto Protocol’s reliance on 1990 emissions levels for its "measuring stick" may create a dubious distribution of emissions credits. Countries like Russia experienced large reductions in industrial production that coincided with the downfall of the communist system. This reduction in production has brought Russia underneath its 1990 pollution level, not because Russia has become more environmentally conscious, but because its industries have become dormant. The system as currently envisioned would give Russia a large number of emissions credits without any Russian environmental progress.
Two, many environmentalists are concerned that nations with pollution problems will continue to pollute and offset their carbon emissions by planting trees or adopting other eco-friendly policies that do not interfere with their pollution rates. Scientists and bureaucrats alike are still debating the value of forests relative to a nation’s emission levels. How their conclusions are embodied in any emissions trading regime will have a great effect on the overall success of the system (Hertsgaard, and Wirth).
Recent research by the United Nations Conference on Trade and Development (UNCTAD) has suggested both advantages and disadvantages from emissions trading markets.
Advantages. One of the most basic advantages to emissions trading
markets is that they level the playing field between industries attempting
to control greenhouse gas emissions. Some industries face enormous costs
in reducing emissions while others can achieve reductions relatively cheaply.
By creating emissions trading markets, industries can spread emissions reductions-related
costs across the national (or international) economy more evenly. One UNCTAD
study (Aslam et. al., 7) estimated that emissions trading systems could reduce
the cost of cutting emissions by 20-50% when compared with "one size fits
all" regulations on all industries. Such savings to industries provide market
incentives to make emissions reductions. Ultimately, reduced costs on industries
and businesses should benefit all of society by facilitating emissions reductions
and maintaining economic growth.
Disadvantages. One potential disadvantage to emissions trading is that it may not solve localized pollution problems. If pollution is concentrated in a particular location and eminates from a particular industry, that pollution might continue to harm the local environment, even if, on balance, national or international emissions are reduced (Aslam, et. al., 9).
The environmental impact of emissions trading will be directly related to the continuing evolution of the world market in carbon emissions. Successful markets will reduce the total level of global emissions; a rise or even level of emissions will signal market failure.
Governments can be expected to behave in ways that maximize their national interests. If reducing emissions will be costly, they can be expected to exploit legal loopholes (in verification procedures, for example; see the Legal clusters) in the emissions trading regime. There is thus a very close relationship between the trading process and the environmental problem that process seeks to solve: excessive greenhouse gas emissions.
Emissions Reduction Unit (ERU): Created when a country (or private entity within that country) reduces emissions in another country, thereby earning itself credit against its negotiated domestic emission limit (Nordhaus, et. al., 10838).
Assigned Amount Unit (AAU): a unit (usually one metric ton) of emissions that can either be used by polluting that amount or by selling that amount of permissible pollution to a nation that is over its pollution ceiling (Nordhaus, et. al., 10838). This term is not in the text of the Kyoto Protocol but is used to reference the provisions of Article 17.
Estimates indicate that emissions trade in the United States domestic market could reach $100 to $500 billion annually (though the United States is not a Kyoto signatory). Estimates of global trade put the potential value of the world-wide emissions market at several trillions of dollars (Spotts).
A country restricted from engaging in emissions trade might (either intentionally or unintentionally) fail to meet its Kyoto treaty commitments. Such a result would undermine the goals of the agreement. See the Legal clusters for more information on enforcement of the Kyoto mandates.
Because trade in this case is largely theoretical -- obviously one cannot
pull pollution from the atmosphere and redistribute it to the world community
-- the distinction between imports and exports is largely in the eye of
the beholder. For the sake of simplicity in reading emissions data in this section, carbon
emissions may be thought of as the "commodity" to be traded.
The nations who exceed their emissions caps by the greatest margins will,
by definition, be the largest potential exporters of carbon emissions. The
largest importers are defined here as the nations with the highest ability
to engage in emissions trading by virtue of their emissions credits surplus.
Based on this analysis, the key exporter of carbon emissions that has signed the Kyoto Protocol (the United States would be first if it had signed the agreement) is Japan. Japanese carbon emissions data from 1990 to 1998 -- the latest year available -- is listed below, where the emissions are in thousand metric tons of carbon.
| Year | Carbon emissions |
| 1990 | 292212 |
| 1991 | 298188 |
| 1992 | 301497 |
| 1993 | 294683 |
| 1994 | 308600 |
| 1995 | 310287 |
| 1996 | 318686 |
| 1997 | 317596 |
| 1998 | 309353 |
For this section's purposes, Russia may be considered the key importer of carbon emissions (or, alternatively,
exporter of emissions credits) by virtue of the number of emissions credits
it can expect to claim in any emissions trading regime. Russia in particular
might see this market as lucrative because of its need for the income that
emissions credits might provide. Russia’s emissions numbers since the end
of the Soviet Union are as follows:
| Year | Carbon emissions | |
| 1992 | 541492 | |
| 1993 | 502268 | |
| 1994 | 433935 | |
| 1995 | 422068 | |
| 1996 | 415296 | |
| 1997 | 400998 | |
| 1998 | 391535 |
As the two tables demonstrate, the advent of an emissions trading market could be very important to both nations. Russia, based on these numbers, would have a substantial supply of credits to trade and Japan -- unless it were able to mount an economically painful effort to reduce its emissions -- would need to purchase emissions credits from someone to make up for excess pollution. Japan would have needed to buy 17,141 credits. Russia would have been able to provide up to 149,957 credits. (Data gathered from Marland, et. al.)
There are many chemicals in the earth’s atmosphere. These chemical gases
allow sunlight -- including radiation -- to pass through the atmosphere. The
same gases, however, trap infrared radiation that is reflected from the
earth’s surface before it can escape back into space. As a result, heat
is retained, creating a "greenhouse effect." Many gases contribute to the
greenhouse effect including naturally occurring gases like methane, carbon
dioxide, and nitrous oxide. Several man-made gases like chlorofluorocarbons
(CFCs) and sulfur hexafluoride (SF6) also have a greenhouse effect ("Greenhouse Gases").
Since large-scale industrialization began about 150 years ago across the
world, atmospheric concentrations of greenhouse gases have increased about
25%. Many scientists believe that this increase is attributable to human
activities. The most significant human behaviors responsible for the greenhouse
effect include deforestation and the burning of fossil fuels ("Greenhouse Gases").
The World Meteorological Organization (WMO) contends that 2001 was the
second warmest year on record and that nine of the ten warmest years ever
recorded have occurred since 1990. In addition to analyzing world temperature
data, the WMO believes, based on its data, that temperature fluctuations
have had a discernable impact on weather and precipitation patterns across
the world. The WMO cites many areas that have experienced flooding and increased
rainfall, while other areas have undergone droughts ("WMO Statement").
Extra greenhouse gases in the atmosphere would not be particularly worrisome
if it weren’t for the impact such gases are thought to have on the global
climate. The balance of evidence suggests that the gases released into the
atmosphere by human beings have caused the average surface air temperature
of the earth to increase between .3 and .6 degrees Celsius since the late
19th century ("Greenhouse Gases").
Projections indicate that, absent regulation, emission levels will increase
dramatically over the next several years as the earth’s population increases
and as many countries across the world begin their own processes of industrialization.
Some groups, like the Intergovernmental Panel on Climate Change (IPCC),
are worried that these expected increases in emissions will result in even
more dramatic increases in the world’s temperature. In their meeting in
Shanghai in 2001, scientists projected that global temperatures could rise
almost 6 degrees over the next hundred years ("Renewed Warning").
It should be noted that not everyone is convinced of the validity of these studies on global warming. Independent scientists have generated assessments of climate change that are far different from U.S. government. Researchers at the University of Alabama-Huntsville, for example, produced data suggesting both that warming was occuring at a slower rate than previous studies had indicated and that the warming which was observed was relatively harmless ("Global warming anyone?").
Alternative energy sources could eliminate the necessity of burning the
fossil fuels which emit the dangerous greenhouse gases that are the source
of global warming. The U.S. Environmental Protection Agency, for example, discusses a variety of alternatives to power generated by burning coal or natural gas. That discussion is available here.
Some countries, particularly those with strong industrial sectors, are particularly affected by the provisions of the Kyoto accord. Nations like Japan, one of the highest polluters to be a protocol signatory, had extensive domestic debate over the decision to join the agreement and the conditions under which it could achieve compliance ("Business Leaders").
International relations are increasingly marked by agreements that govern
multilateral issues like trade and the environment. One of the most important
international environmental issues concerns global warming and the perceived
need for international action. This is because environmentally destructive
behaviors in one country are almost certain to eventually effect the environment
of other countries. Nations that are relatively environmentally responsible
do not wish to experience the negative impacts of lax environmental standards
elsewhere. Some international relations scholars have even suggested that
the failure to recognize the trans-national nature of environmental problems
like global warming may impede nations (such as the United States) from
achieving its national interests (Mathews).
Aslam, Malik Amin et. al. Greenhouse Gas Market Perspectives: Trade
and Investment Implications of the Climate Change Regime. UNCTAD/DITC/TED/Misc.9
(Geneva: United Nations, July 2001). http://www.unctad.org/ghg/Publications/Manual_draft.PDF
"Business leaders not as keen on green as gov't." The Daily Yomiuri (Yomiuri,
Japan) 13 Nov. 2001. Retrieved from Lexis-Nexis.
DeMuth, Christopher. "The Kyoto Treaty deserved to die." The American
Enterprise. Sept. 2001: 43-45.
Foroohar, Rana. "There's Gold in that Dirty Mess." Newsweek. 27 Aug 2001: 36.
Global Greenhouse Emissions Trader, Issue 9, Greenhouse Gas Emissions
Trading Project of the United Nations Conference on Trade and Development,
9 Jan 2001. http://www.unctad.org/ghg/Newsletters/newsltr9.pdf
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Grunwald, Michael and Eric Pianan. "Bush EPA Expands Emissions Trading,"
Washington Post, 15 Feb 2001: A02
Hertsgaard, Mark. "Bush and global warming." The Nation 10 Dec 2001: 5-6.
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Lindsay, James M. "Global warming heats up: Uncertainties, both scientific
and political, lie ahead." Brookings Review. Fall 2001: 26-29.
Marland, Gregg, Tom Boden, and Bob Andres. "National CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring: 1751-1998, July 31, 2001," Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory. http://cdiac.esd.ornl.gov/trends/emis/annexb_countries.htm
"Making Kyoto Pact Legally Binding." CBSNews.com. 29 Oct. 2001. Available at http://www.cbsnews.com/stories/2001/10/29/archive/printable316244.shtml
Mathews, Jessica. "Estranged Partners." Foreign Policy. Nov./Dec.
2001: 48-53.
Nordhaus, Robert R., Kyle W. Danish, Richard H. Rosenzweig, and Britt Speyer Fleming. "International Emissions Trading Rules as a Compliance Tool: What Is Necessary, Effective, and Workable?" Environmental Law Reporter, October 2000
Novak, Mary H. "Can Annex B Countries Meet Their Commitments?" ACCF Center for Policy Research Special Report, October 1999, http://www.accf.org/AnnexB1099.htm
"Outcomes," The Kyoto Protocol and the WTO: ICTSD/IISD/RIIA Side Event
to the UNFCCC / COP-6, The Hague, Netherlands, 20 Nov 2000. http://www.ictsd.org/dlogue/2000-11-20/20-11-00-outc.htm
Pomeroy, Robin. "EU states agree to ratify Kyoto climate treaty." Reuters. 5 Mar 2002. Available at http://sg.news.yahoo.com/reuters/asia-92853.html
"Renewed Warning on Extent of Global Warming," Environment News (UK), 8
Oct 2001, retrieved from Lexis-Nexis.
Spotts, Peter N. "US Bubbly Over Carbon Trade." Christian Science Monitor.
24 Nov. 2000. Retrieved from http://www.csmonitor.com/durable/2000/11/24/fp6s1-csm.shtml
Tietenberg, Tom, Michael Grubb, Axel Michaelowa, Byron Swift, and Zhong Xiang Zhang. International Rules for Greenhouse Gas Emissions Trading: Defining the principles, modalities, rules, and guidelines for verification, reporting and accountability, UNCTAD: UNCTAD/GDS/GFSB/Misc.6. May 1999. Available at http://www.unctad.org/ghg/Publications/intl_rules.pdf
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5 Dec 2001, http://www.enn.com/news/enn-stories/2001/12/12052001/s_45776.asp
Wirth, Timothy. "Hot air over Kyoto: The United States and the Politics of Global Warming." Harvard International Review. Winter 2002: 72.
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