Slow progress down the rocky road from Kyoto

Efforts to resolve the many uncertainties over the implementation of the Kyoto Protocol are proceeding at a snail's pace. The EC and USA are at odds over the need for ceilings on the use of "flexible mechanisms" such as emissions trading. Moreover, evidence is mounting that the Protocol's aims could be scuppered by trading in "hot air" emissions from Eastern Europe and liberal interpretation of the rules on defining carbon sinks.

The Kyoto Protocol, agreed in December 1997, was perhaps the most complex and potentially far-reaching achievement of international environmental diplomacy. Developed nations agreed to cut their emissions of greenhouse gases by 5% below 1990 levels - and by 30% below projected levels - by 2008-12. However, agreement was made possible only by postponing crucial decisions on the Protocol's implementation (ENDS Report 275, pp 16-20 ).

Slow progress on implementation
The problems were thrown into stark relief at the fourth Conference of Parties (COP-4) to the 1992 UN Convention on Climate Change, held in Buenos Aires last November. Most notably, the USA revived efforts to force developing countries to demonstrate "meaningful participation" in efforts to limit emissions.

The main outcome of COP-4 was a work programme to develop rules governing the use of the Protocol's "flexible mechanisms". Final decisions on these and other key issues are to be reached at COP-6, to be held in The Hague in late 2000 or early 2001. Intriguingly, the US Presidential and Congressional elections - which will have a powerful bearing on US ratification and on the fate of the Protocol as a whole - will be held in November 2000.

Half-way between Kyoto and COP-6, progress remains painfully slow. True, a two-week negotiating session held in Bonn in early June saw constructive moves on some technical aspects of the Protocol (see box ). But this limited progress was achieved by leaving the most contentious issues to one side.

A cap on trading
One long-standing stumbling block is the degree to which developed countries should be allowed to rely on flexibility mechanisms to meet their emissions commitments.

The Kyoto Protocol papered over deep divisions on this question. It states that two of the three flexibility mechanisms - emissions trading and joint implementation - should be "supplemental to domestic actions" for the purposes of meeting national emission limits. No such requirement applies to the "clean development mechanism" (CDM), under which industrialised nations can secure emission credits for investing in low-emission projects in developing countries.

The main players remain as divided as ever over what "supplementarity" might mean in practice. In May, EC Environment Ministers staked out their position in a formula designed to ensure that developed countries achieve most of their emission reduction targets through domestic measures.

EC countries are convinced that a "concrete ceiling" on use of the mechanisms is needed to ensure that developed nations begin to modify their long-term emission trends - paving the way for more ambitious reductions which will be needed to stabilise greenhouse gas concentrations in the atmosphere. Indeed, developing countries argue that they should not face emission controls until the industrialised world, which built its wealth on unconstrained fossil fuel consumption, acts to put its own house in order.

Despite broad agreement on the principle, it took more than a year for EC Member States to agree a precise formula. One early suggestion was to require each country to use domestic measures to fill at least 50% of the gap between its Protocol target and emissions under a "business as usual" scenario. This approach does not feature in the final proposal because of the major uncertainties involved in emission forecasts. But its spirit survives in Ministers' "informal understanding" that at least 50% of the "effort" needed to meet the targets should be made domestically.

The EC's proposal offers a choice of two formulae to determine the maximum number of emission credits which any country can acquire under all three Kyoto mechanisms - including the CDM.

A party would be permitted to exceed the higher of these limits - but only if any additional use of the mechanisms was matched by equivalent domestic reductions from action taken after 1993. ENDS understands that this element of flexibility is intended to assist a few countries, including Japan, which face particularly tough challenges in meeting their targets under the Protocol.

Finally, the EC also proposes a ceiling on the degree to which parties can sell or "transfer" emission credits. The aim of setting ceilings on buyers and sellers is to limit trading in so-called "hot air" - "surplus" emissions created by the generous emission targets granted to some of the former Soviet bloc. Many observers fear that the potentially huge pool of hot air available in Russia and the Ukraine could drastically undermine the Protocol's effectiveness and credibility (see below).

Hostile reaction from the USA
The EC proposal met with a predictably hostile reaction from the USA, which dubbed it "an attempt to rewrite the Kyoto Protocol". The "Umbrella Group" of nations, which includes the USA, Australia, Japan and Russia, wish to make unrestricted use of trading and other mechanisms. They argue that the EC has already made full use of one "flexibility" mechanism under the Protocol - by agreeing to carve up its own emissions target under an internal "burden-sharing" agreement (ENDS Report 281, p 46 ).

In June, US Under Secretary of State for Global Affairs Frank Loy claimed that the EC was "politically naive to believe that raising the costs of implementation" would not jeopardise the chances of the US ratifying the Protocol. He told a conference organised by the Royal Institute for International Affairs (RIIA) that emission reductions achieved in Europe by economic collapse in Eastern Germany, the UK's "dash for gas" and slow economic growth in France could also be viewed as "hot air".

Mr Loy accepted that "the aggregate costs [of complying with the Protocol] in near-term dollars are not significant, and are not the reason for failing to act." To date, most studies put the costs of complying with the Protocol at less than 1% of GDP over the next decade for most OECD countries. However, Mr Loy pointed to modelling by the OECD which suggests that unrestricted international trading could reduce overall compliance costs by 20-30%.

A preliminary analysis of the EC's proposal has been carried out by the International Energy Agency (see table ). For several reasons, such as the exclusion of greenhouse gases other than energy-related carbon dioxide emissions, the IEA's model may overstate the restrictions on trading. Nevertheless, it offers a useful insight into the impact of the ceilings.

The IEA estimates that on a "business as usual" scenario, potential buyers of emission credits are likely to emit three billion tonnes of CO2 more than their combined targets under the Protocol by 2010. The USA alone accounts for two-thirds of this forecast exceedence.

However, the IEA reckons that the EC proposal would allow buyers to acquire barely one-third of this gap through trading or other mechanisms. The rules would bite hardest in the USA and Australia - two of the countries which want to make strong use of the Kyoto mechanisms.

However, the IEA's analysis suggests that the EC's proposal could succeed in curbing trades in hot air. It estimates that by 2010, CO2 emissions from countries in Eastern Europe, Russia and the Ukraine will be about 574 million tonnes lower than in 1990. The EC's rules would allow just 190 million tonnes of this surplus to be sold.

Wrestling with hot air
Two other recent analyses vividly illustrate the potential for "hot air" and other unresolved issues to undermine the effectiveness of the Protocol.

The first report, by Greenpeace, assessed the latest official projections for industrialised countries' emissions in 2000 and 2010. It concludes that potential and actual "loopholes" in the Protocol could mean that their total emissions are 7% higher in 2010 than in 1990. This figure is 12 percentage points above the Protocol's aim of a 5% reduction - and just one point below the business as usual case.

According to Greenpeace, unrestricted hot air trading could allow a significant increase in total emissions from developed countries. The CDM could increase their emissions by perhaps 3%. And weak interpretation of the rules on carbon "sinks" to include agricultural activities, forest harvesting and regrowth could increase the bubble by a further 7-8% - allowing developed countries' emissions to remain almost unchanged.

Greenpeace's broad conclusion is supported by a new book on the Protocol written by Michael Grubb and other researchers at the RIIA.1 This warns that surplus emissions allocations given to Russia and Ukraine represent 5-10% of the total allocation to developed nations - threatening to "undermine the legitimacy of emissions trading." Indeed, Mr Grubb warns that Russia's surplus allocation could turn out to be even larger, given the "extreme inefficiencies" in its economy.

Moreover, Mr Grubb warns that the "hot air" issue could have "fatal" implications for the expansion of the Protocol regime. Developing countries are under pressure to sign up to binding emission commitments in future. Mr Grubb warns that they would be likely to seek "inflated or too cautious targets that would inject an expanding volume of hot air, and result in the collapse of any incentive to meaningful action." For example, emissions in Kazakhstan, which hopes to sign up to limits at COP-6, have dropped to barely half of the 1990 level.

Mr Grubb concludes that permissive rules on the Kyoto mechanisms, as sought by the Umbrella Group, could lead to "massive inflation" under which credits become "essentially worthless". "Implementing the Kyoto Protocol without reference to long-term goals and trajectories would," the book concludes, "be like inviting Treasuries to print money without any conception of inflation."

Action in the EC
Nevertheless, both the EC and developing nations are beginning to warm to the potential benefits of a well-regulated international emissions trading scheme.

In May, the European Commission published a Communication on implementation of the Protocol. It proposed wide consultation in 2000 on options for an EC-wide emissions trading system, with a view to launching it in 2005.

The Commission notes that "so far there is hardly any experience" of emissions trading in the EC. However, national schemes are taking shape in several Member States, including the UK (see pp 3-4 ) - and the Commission hopes to ensure that they develop along the same lines in order to give the EC a unified voice in discussions on wider international trading.

The Communication implies that EC countries may need to make significant use of the Kyoto mechanisms. It identifies a gap between "ambitious" EC international negotiating positions and practical actions to achieve its Kyoto target of cutting emissions by 8% from 1990 levels - representing a 14% reduction on the business as usual case.

The Commission complains of a "disappointing record" in agreeing concerted EC action. It complains of "deadlock" in the Council of Ministers over the proposed tax on energy products, and insufficient resources for energy efficiency and renewable energy schemes. The paper calls for "substantial improvements" in EC climate policy measures.

Sinks and the CDM
Despite its fundamental importance to the future of the Protocol, the issue of capping the use of flexible mechanisms was left to one side at the negotiating meeting in Bonn in June.

One of the main developments at the meeting was that the G-77/China group of developing countries stitched together a relatively positive compromise position on use of trading and the CDM. Some progress was also made on methods for accounting and verification, and for ensuring compliance, and further developments are expected in the run-up to COP-5, due to be held in Bonn at the end of October.

However, numerous crucial decisions are queuing up to be made at COP-6. The risk is that the issues will be too complex to be sensibly resolved by the sort of last-minute compromises that salvaged the Kyoto meeting.

The CDM is a priority, as the intention is that it should begin operation in 2000 or soon afterwards. Mr Grubb notes that "the combined lures of foreign investment and cheap emission reduction credits have created political pressures for the rapid development of rules for the CDM that are potentially dangerous." Indeed, both the investor and the host nation have strong incentives to overstate the emission reduction benefit of a CDM project.

One of the main unresolved problems with the CDM is how to ensure that projects will deliver both real and additional emission reductions. This is compounded by the paradox that the most "cost-effective" projects are likely to be the least "additional".

Another important issue is which land use changes and forestry activities will be allowed to be counted as carbon sinks under the Protocol. This could, as Greenpeace's analysis shows, open up perhaps the largest loophole in the Protocol - particularly as data on carbon sinks are of very poor quality. For example, Australia's estimates for 1990 emissions have changed dramatically in successive revisions - such that land use change and forestry has gone from being a huge source of CO2 to being a sink, and back to being a net source.

Significant progress on sinks is unlikely until the Intergovernmental Panel on Climate Change publishes a special report on the issue next summer. However, parties such as Canada, the USA and Australia - which are keenest to use sinks to help meet their targets - have been reluctant to provide quantitative data on the effects of including agricultural and forest management activities.

Finally, another important question is who should bear the liability for international emissions transactions. Mr Grubb warns that seller-only liability could undermine compliance by encouraging over-selling. He argues that shared or "buyer beware" liability could reward good behaviour - though this could lead to different values in emission credits obtained from different sources, depending on their perceived reliability.

All these uncertainties raise serious doubts over the prospects for the Protocol entering into force - or doing so in time to deliver the promised emission reductions.

Simon Upton, New Zealand's Minister for the Environment, gave a bleak assessment of the position at the RIIA conference. "Each of the three main groups regard it as an achievement if they manage to negotiate a common internal position," he said. "There are large submerged reefs in this debate that we're all steering clear of - and at this point it's as likely that the Kyoto Protocol will be stillborn as be brought into force."

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