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The threat from increasing concentrations of greenhouse gases has become a serious issue for the world’s governments. If trends continue, atmospheric changes due to human activities could alter our planet’s life-support systems. That was the impetus for creating a treaty called The United Nations Framework Convention on Climate Change (UNFCCC), “the centerpiece of global efforts to combat global warming,” at the 1992 Earth Summit in Rio de Janeiro. (1) The convention’s objective is “the stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic (man-made) interference with the climate system.”

The UNFCCC, which was signed by most nations, included a voluntary pledge that the developed countries would reduce their emissions to 1990 levels by the year 2000. As scientific evidence mounted over the destructive contribution of human activity and it became apparent that countries such as the United States and Japan would be unable to uphold their promises, the nations reconvened. In Berlin in 1995, the Conference of the Parties (COP) the 170-plus nations that ratified the UNFCCC decided “to enter into negotiations on a protocol to establish legally binding limitations or reductions” in emissions. The event was called COP-1 and was the first session of what became an annual meeting to analyze the efficacy of climate change programs, review scientific data, and monitor the emission commitments declared by certain countries. (2)

The Kyoto Protocol was the result of the “Third Conference of the Parties” (COP-3) in December of 1997. It “represents the first time that negotiators have adopted binding emission reduction targets and timetables for Annex I countries (developed nations plus economies in transition).” In other words, 38 industrialized countries agreed to reduce their collective emissions of six greenhouse gases by at least 5% below 1990 levels by 2008-2012. For example, the U.S. would be required to reduce its emissions 7% lower than 1990 levels, while Iceland is allotted a 10% increase. Since emissions would increase in the absence of such stringent control measures, it has been calculated that a 5% reduction of 1990 levels by 2012 actually represents about a 29% cut. Once 55 countries “including a sufficient number of Annex I countries representing 55 percent of total Annex I CO2 emissions in 1990” ratified it, the Protocol’s emissions commitments would go into effect. It was released for signature in March 1998 and 71 countries had signed it by January 1999.

For some countries, achieving a significant decrease in emissions means spending billions of dollars to upgrade plants and monitor individual, corporate, and government activities. Conversely, other countries may have considerable leeway between their allotted emissions and their actual emissions. Recognizing this situation and realizing that “it doesn’t matter where on earth the reductions actually occur,” the Parties developed three cost-effective solutions for balancing the burden: emissions trading, the Clean Development Mechanism (CDM), and joint implementation. (3) A country or company whose emissions reductions are too costly “may purchase additional emissions units from those emitters that have more units than they need (because they have already met their targets with room to spare).”(4) Emissions trading “encourages reductions where they can be achieved at the lowest cost, thus getting the world the most greenhouse gas reductions for each available dollar, euro or yen.” Another way for a country to comply with its restrictions is to finance the improvement of industries in developing countries, thereby introducing better technology and cutting emissions abroad while receiving domestic credit. Such joint implementation provides mutual benefit, which is the purpose of the Clean Development Mechanism.

By imposing emissions restrictions, “the Protocol encourages governments to improve energy efficiency, reform the energy and transportation sectors, promote renewable forms of energy, phase out inappropriate fiscal measures and market imperfections, limit methane emissions from waste management and energy systems, and protect forests and other carbon ‘sinks.'” The Protocol’s “tangible rewards for innovation should result in a steady stream of cost-saving breakthroughs and new technologies.”(5)

As good as this sounds, there are still several loose ends. Before an international system will work, national systems must prove effective. This involves deciding who gets control of emissions rights to a commodity that is no longer free. (6) Granting official rights to one company might mean refusing to let another company continue to emit at its previous levels, which would have to involve some sort of compensation for the latter. The worldwide distribution of emissions rights is therefore an even more complex issue. “Some NGOs [Non-Governmental Organizations] and developing countries believe that the targets should be based on a pre-set per capita emissions level, arguing that this is the most equitable and enduring system because all citizens of the world would have the same ‘right’ to emit. Others criticize the per capita system as being politically unrealistic.” By giving everyone the same allowance on emissions, the industrialized countries who labored to develop a high standard of living might witness “a wealth transfer from developed countries to developing countries on a scale that [they] are unlikely to accept.”(7) Once targets have been decided, the degree of international emissions trading in order to stay below targets may be have to be limited so that countries will focus more on reducing their levels than acquiring extra emissions permits. (8)

Many of the unresolved issues in the Kyoto Protocol were expected to be settled at the 1998 Conference of the Parties (COP-4) in Buenos Aires, Argentina. But in the year leading up to the conference, disagreement regarding the complexities inherent in the emissions trading plan still lingered. Upon commencement, the 5,000-plus participants of COP-4 decided to focus instead on a two-year “Buenos Aires Action Plan” that would allow more time for analysis and negotiation over the difficult issues, with the goal of establishing a work plan by the end of 2000. But even this more modest action plan is considered to be flawed by some. One observer stated, “Even under the best conditions, a decade will be needed. The Buenos Aires road map allows only two years. That rapid timetable will yield a half-baked system that destroys the credibility of the trading concept for the future.” The conference itself spurred little progress. According to John Carlisle of the National Center for Public Policy Research, “By the close of the conference, it was apparent not only that the positions of the European Union, the United States, and the developing nations were no closer to each other than when the conference convened, but that new divisions had developed.”(9) Sergio Federovisky, the conference’s newspaper editor, remarked that “The Protocol is plagued with ‘invisible brackets’ containing an infinite number of ‘vetoes.’ These ‘invisible brackets,’ he noted, ‘bury it in inactivity.’

It was not until the end of the Buenos Aires conference on November 12, 1998, that the U.S. signed the Kyoto Protocol at the United Nations building in New York City. While signing reaffirms its commitment to achieving emissions goals, the U.S. is not bound by the Protocol’s restrictions unless the U.S. Senate ratifies it. President Clinton has so far refused to submit the Protocol to the Senate unless “key developing countries” also agree to have binding emissions targets imposed on them. The first to “cave,” as critics put it, were Argentina and Kazakhstan, who may stand to profit.

The participation of non-Annex I countries would make a significant difference in emissions trading because they may have a much greater supply of emissions credits than they need. The greater the supply in these countries, the lower the trading price; whereas the Annex I countries have little supply so the cost of purchasing their rights is high. Optimists believe that in a truly global trading system, predicted supplies will be so ample that prices should fall by two-thirds (or more) and Annex I countries will import about 70 percent of the total reduction requirement.” But there is a debate over the issue of “supplementarily,” which is a restriction that “a nation cannot entirely fulfill its responsibility to reduce domestic emissions by relying primarily on emissions trading or joint implementation to meet its targets.” It is only allowed to supplement its emissions reductions by purchasing a limited number of rights. Nevertheless, the U.S. opposes a cap on trading limits. Its belief is “that limits on GHG trading are intended in part to shift more of the cost burden to the U.S. versus the EU [European Union], enhancing the economic situation of the latter over the former.”(10)

The motives of the U.S. are apparent when the monetary savings it would experience from trading are reviewed. One study calculates that the U.S. could save between $30 to $170 billion overall on emissions rights by participating in full global trading (at an estimated $70/ton) as opposed to Annex I trading (at $100/ton) or no trading at all (at $240/ton). Another source reported that “losses are highest in the absence of trade they approach $90 billion in 2010. This is approximately one percent of U.S. GDP. To the extent that as more trade is introduced, losses decline. Under the most optimistic option (full global trading), losses are approximately $20 billion or one-quarter of one percent of GDP in 2010.”

Although the U.S. might save billions of dollars by holding out until developing countries agree to emissions reduction targets, critics believe ” America ‘s government has missed the point.” It has been suggested that because the U.S. emits a disproportionate amount of greenhouse gases, it would be wiser to bring non-Annex I countries into the scene gradually via the Clean Development Mechanism. Special interest groups trying to block global warming action have been blamed for lack of full U.S. participation. Opponents of emission trading who fear it is a loophole for rich countries to buy compliance rather than cut emissions will probably claim that trading was unworkable even though a sensible trading system with fair permit allocations was never attempted.

The involvement of developing countries, or at least all major emitters, may ultimately be required if countries are going to reduce emissions as a global whole. But developing countries are not yet required to meet any limitations unless they volunteer themselves. Controversy surrounds this issue like a cloud of smoke. Some critics of the trading system argue that as developing countries take on voluntary commitments there will be an incentive for both developing and developed countries to set unrealistically high targets. This will ensure that developed nations can buy unused permits from the developing countries rather than reduce their domestic emissions. And setting limitations on developing countries is unfair given their low historical emissions levels resulting from their earlier stage of industrial development. It is doubtful that these countries are likely to agree to a program that forces them to carry more than a fair share of the burden of compliance.

On the other hand, by not participating, developing countries involved in energy-intensive industries could offset the reductions that Annex I countries have worked so hard to accomplish. This “leakage” could become a serious issue if high-emitting industries were to migrate outside of Annex I nations and continue uncontrolled production of greenhouse gases. This scenario creates unfair competition that favors non-Annex I countries which could continue to manufacture energy-intensive products such as steel, chemicals, and paper, while developed countries decreased their production in order to meet their commitments. In the event that developing countries decide to participate, they could choose to hold onto their unused permits, thereby implying they “prefer that developed countries reduce their emissions rather than buy the permits to cover them. This idea has even been implemented by schools and environmentalists who have purchased permits and taken them off the market in order to reduce emissions overall.

The trading of emissions rights could become so money-oriented that countries focus more on permits than actual reductions. For instance, “prospective Annex I countries are likely to want to protect themselves by claiming the need for some ‘headroom.’ Unfortunately, granting ‘headroom’ increases the probability of ‘hot air'” [the idea that some countries could accomplish their emissions limits without much effort and release a deluge of permits into the world market, leaving little incentive for other countries to reduce their own emissions]. To many countries, considering the merits and drawbacks of an emissions trading system, this ‘hot air’ that results in low permit prices could be detrimental. Though it may be economically favorable, it would be responsible for slowing progress towards long-term emissions cuts. The Kyoto Protocol has been criticized for being “inconsistent with a cost-effective long-term strategy for stabilizing CO2 concentrations.” Because of its focus on “sharp near-term reductions,” little time is allotted for the development of less costly, low-carbon alternatives.

Many countries are in disagreement of emissions trading altogether. While Australia, Canada, Iceland, Japan, New Zealand, Norway, Russia, and the U.S. (JUSCANZ) favor the system and have proposed trading rules, many countries in G77+China (a group of 132 developing countries) are skeptical of the system. They “are concerned that trading will be used by developed countries to avoid domestic actions. They argue that countries such as Russia and the Ukraine who have experienced an economic decline since 1990 will have a huge surplus of credits to trade. This surplus or ‘hot air’ would then flood the market and create an inexpensive means for countries such as the U.S. to avoid domestic action.”

Even worse, the excess Russian and Ukrainian permits would result from combustion decreases due to economic collapse rather than strides made in greenhouse gas reductions. Experts note that “declining living standards are not a sustainable way to slow global warming. When the economies rebound, so will emissions.” In the meantime, they could make $100 billion without any concern for emissions reductions whatsoever. The European Union is in the middle of the debate’s two extremes. These nations (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK) want “to ensure that there is an adequate compliance regime in place before trading occurs.”

A vital component of the emissions trading system is the honest and accurate tracking of emissions, trades, credits, and so on. Each country that agrees to accept limitations must “have the necessary capacity and infrastructure to measure and report on its emissions.” This means every country would need a computerized national registry in order to record who has tradable permits and at what prices, up-to-date trades that have taken place, and remaining credits that can be used to cover future emissions. The Secretariat of the UNFCCC would need to have access to everyone’s records in order to monitor each country’s compliance with their commitment. Losing trade eligibility due to poor maintenance of a country’s registry could be a strong incentive for buyer and seller countries to continue to comply in order to reap the benefits of each other’s participation. But even the tracking of emissions is problematic, considering “the inherent uncertainty in verifying GHG [greenhouse gas] emissions. Even the best scientific methods do not eliminate the uncertainty in the measurements.”

Emissions control and trading will be a difficult system to implement. “The issues are complex, the impacts of policies are large and unevenly distributed, and the costs of erring in any direction are high.”(11) Unresolved problems will continue to plague the Kyoto Protocol until the Parties representing the UNFCCC hammer out resolutions that represent a fair compromise for everyone. Negotiations will continue to be thwarted by reminders that technological change “can’t be planned according to Kyoto-like short-term binding emission targets.” The work plan, therefore, must continually question whether the Kyoto Protocol is even the best way to accomplish long-term, cost-effective global goals.