Post-Kyoto climate policy possible

Although fraught with scientific uncertainty, there is a growing consensus that our planet, probably because of natural forces and climate cycles but very likely reinforced by human emissions of greenhouse gases, is still experiencing a period of gradual warming that has been in progress since the last Ice Age.

This long-term trend can be addressed only by similarly long-term initiatives. This article attempts to outline current understanding of the problem, to update the political situation, and to provide some constructive suggestions that may help bridge the gap between rhetoric and reality.

Only when the ramifications of both the problem and the proposed solutions are well understood-both by the public and by policymakers-will we be able to identify new, more-promising approaches to dealing with those climate-related changes that do eventually arise.

It has become a cliché that the world's economy is inextricably intertwined both with its energy supply and with the global environment. Energy drives the economy, which, in turn, provides the wherewithal to protect the environment.

Continued success requires progress on all three parts of the equation. A healthy planet makes life worth living and provides valuable resources and services needed by the economy.

The efficient use of all forms of available energy (all of which originally came from the sun) and other natural resources is necessary in order to continue to raise standards of living everywhere. Economic progress is the path to a peaceful world that has the knowledge, the interest, and the wherewithal to use, understand, and protect the environment in a never-ending cycle.

Alternatives

For 4 years, working out the details of the Kyoto Protocol has dominated international efforts to mitigate possible human-caused impacts on the changing global climate. Now that process seems to be nearing an end.

Although it is still possible that the rest of the world could move to implement the protocol, without US involvement, it would have relatively little effect on atmospheric greenhouse gas concentrations. If the US is not a full participant in the process, it might also prove more difficult to begin the next steps.

Although there have been enormous strides in the past decade toward understanding the global climate, it remains inherently uncertain. Each new discovery leads to new questions about the interrelationships among the extremely complex factors that influence Earth's life-supporting climate.

In the face of such uncertainty, it is important for society to make choices that will both continue to raise standards of living and hedge against possible future problems.

Continued research and economic development are the best ways to create the knowledge and the wealth that will enable future generations to deal with the new (and unknowable to us today) problems that will inevitably arise. Rather than trying to solve these problems now, we need to establish options that will make future actions possible.

Two points are central to any effective long-term climate policy. First, we have to make maximum use of market mechanisms that provide consumers and decision-makers with the requisite information for making rational choices among the many alternatives available. Second, we have to find ways to begin immediately to reward behaviors that reduce greenhouse gas emissions now and into the future. All available tools must be considered and used appropriately:

• Reduce, offset, or eliminate the easiest greenhouse gas emissions sources first.
• Use existing energy and other natural resources more efficiently.
• Develop affordable and secure energy supplies.
• Research and develop promising alternative energy technologies.
• Transfer both existing and new technologies to the developing world.
• Study all approaches to mitigate and adapt to inevitable changes in climate.

One thing is certain. There are no easy answers to the questions of whether and to what extent civilization impacts the global climate. All we can do is to move carefully between the extreme views on either side of the issue in ways that ensure our ability to make sound choices as more information becomes available.

Background

In 1992, the US Senate ratified-and President George H. W. Bush signed-the United Nations Framework Convention on Climate Change (UNFCCC).

This international treaty governs the process of dealing with any potential human contributions to continual, long-term changes in the earth's climate.

It also established the Intergovernmental Panel on Climate Change (IPCC), a group of government, academic, and industry scientists and administrators charged with evaluating the overall state of climate science.

A series of international negotiating sessions led up to the Conference of the Parties held in December 1997 in Kyoto, Japan, where participants agreed to the Kyoto Protocol in an all-night session just prior to adjournment.

The administration of President Bill Clinton largely supported the overall goal of trying to reduce greenhouse gas emissions but was appropriately concerned about the potential effect radical reductions might have on the US economy.

In an attempt to hold the projected cost of mandated reductions to a level that the economy could afford, they attempted to negotiate an arrangement that would have permitted economic efficiency to play a major role in the emissions-reduction process-by making use of market mechanisms and greenhouse gas sinks.

The Kyoto Protocol established greenhouse gas emissions-reduction targets for the developed countries, varying by country, that would have resulted in a reduction in their average annual greenhouse gas emissions (largely carbon dioxide) to 5% below 1990 levels by 2008-12.

The protocol excluded developing countries from participation in the mandated reductions in order to permit continued fossil-energy based economic growth in those areas.

The protocol included two market-based flexibility mechanisms-Joint Implementation and the Clean Development Mechanism-that, when coupled with an emissions trading system, were intended to substantially reduce the overall cost of implementation.

In many respects, Kyoto was more a trade agreement than a climate agreement. It was immediately attacked for exempting the developing world, which is responsible for a rapidly growing share of total greenhouse gas emissions. Although these countries now have relatively low per capita emissions, it was evident that their future emissions growth would more than offset any reductions in the developed world, leading to continuing increases in greenhouse gas concentrations in the earth's atmosphere. The developing countries adamantly op- posed any talk of greenhouse gas restrictions for them, either now or at any time in the future.

The European Union generally pushed for and supported the stringent targets and timetables in the protocol, based on the belief that they had at least a fighting chance of meeting their targets without significant detriment to their economies.

In 1997, there appeared to be several reasons for this possibility:

• Europe's economy was at a high point in the cycle in 1990, setting base-year emissions at a correspondingly high level.
• In the 1990s, the UK had converted much of its electricity production from coal to gas, reducing carbon dioxide emissions significantly.
• Germany's shutdown of its incorporated energy-inefficient, coal-based former East German industries meant that Germany was already significantly below its extremely high base-year emissions level.
• The EU was granted the right to allocate its target among member states as it saw fit, thus allowing less-developed regions to continue on a path of rapid economic development and energy consumption growth, much like the developing countries.

The US based its initial agreement to the terms of the protocol on the presumed ability to use the flexibility mechanisms to reduce the overall costs of meeting its considerably more-restrictive target. At the time, it was estimated that, by about 2010, in the absence of significant efforts to reduce greenhouse gas emissions, the natural course of economic development and related energy consumption growth in the US would put it over 30% above-not its targeted 7% below-1990 levels.

The countries of the former Soviet Union were led to believe that they would be able to sell excess credits accruing to them as a result of the conversion of their uneconomic and energy-inefficient, centrally planned economies in the years after 1990. This expected transfer of wealth from the Organization for European Cooperation and Development countries to Russia and Eastern Europe helped gain their support for the Kyoto Protocol.

Host to the Kyoto conference, Japan had a strong interest in ensuring that an agreement was reached. Australia and Canada also supported the protocol, but as energy producers and exporters, they recognized the need for effective market mechanisms and the use of carbon sinks to be able to meet their goals.

The developing countries contended that, because rising atmospheric greenhouse gas concentrations were the result of past economic development by developed countries, it was proper for those same countries to lead the way toward a solution.

Some developing countries also recognized that sustainable development might be encouraged and supported financially through processes like the Clean Develop- ment Mechanism.

An ailing protocol

As time passed, it became increasingly clear that almost no one liked the Kyoto Protocol. Its few remaining supporters continued to back it simply because they had invested much in the process and because they felt that it still represented "a good first step" toward reducing the perceived long-term impact of human beings on the climate.

Even the environmental nongovernmental organizations that largely supported the protocol had their misgivings. They fought to restrict the flexibility mechanisms to the maximum extent possible in order to reduce credit given for what they saw as nonachievements.

Because the reductions in Russian and Eastern European greenhouse gas emissions had already taken place, they argued against allowing credits arising from this so-called "hot air" to be sold to meet other countries' future obligations.

They also argued against widespread use of emissions trading systems because they viewed them as allowing companies and countries to "buy the right to pollute." Sinks also were viewed skeptically as ways for developed countries to evade their commitments to reduce current emissions of greenhouse gases.

Even the EU began to recognize that it would probably be unable to meet its overall target. However, the EU maintained the political pressure because it recognized that it would probably come closer to meeting its goal than the US. Also, it would be to the EU's political advantage at home if it were not seen as opposing the agreement, even though it was increasingly unlikely to enter into force.

The reality is that, although over 100 parties, including the US, have signed the protocol, no industrialized country, no major developing country, and none of the important FSU or Eastern European countries has yet ratified it.

In the US, the Senate is on record as opposing the protocol by an overwhelming majority unless its major flaws are remedied.

The weaknesses of the protocol were exposed in the final discussions held last November in The Hague. At that point, the parties were close to an agreement. In fact, the negotiators had reached an agreement at the bargaining table. When the EU principals reviewed this, however, they rejected it, ending the negotiations.

Problems, opportunities

It is important to remember that everyone in the developed world is an environmentalist, and those in the developing world wish they were rich enough to be environmentalists, too. After the basics-food, shelter, clothing, education, and mobility-are satisfied, people immediately begin to focus on quality of life issues. They not only want more; they want better. New technologies and productivity increases provide the means to achieve these improvements.

Today's discussion on energy and the environment is rarely about ends. Almost everyone thinks we can and should do better on both fronts. The discussion is mostly about means. How do we achieve our shared goals-a cleaner environment and a more secure energy supply-most effectively?

It is essential to understand that there is a close connection between energy policy and environmental protection. Without secure sources of clean energy, we will soon lose the wherewithal to address environmental issues effectively.

Most people still do not link the energy production and delivery system that they use-the benefits of which they enjoy daily-to the performance of the economy and its ability to deliver the environmental improvements they all desire.

The connection between energy, economy, and environment lies most directly in what people tend to think of as "conservation," but which economists describe as "efficient use of resources."

We need energy and other resources, but faced with limited supplies, we must ensure that we use most effectively the resources that we have. In this regard, mountains of economic research clearly prove that the use of market systems results in more efficient use of energy and other resources than with any regulatory system yet devised.

Rather than trying to protect consumers from knowing what things actually cost, as is the case with most utility regulatory systems, consumers should be given the best information available.

Market pricing is an exquisitely rich source of information to help consumers when they need to make choices among alternatives for spending their dollars. It is not helpful when the system disguises real costs and hides subsidies. This is not consumer protection-it is consumer deception.

At the same time, it is essential to make sure that people truly understand the relationship between technical feasibility and actual production costs. The mismatch of actions and perceptions is best shown by the fact that consumer surveys consistently suggest that 60-70% of consumers are willing to pay extra for environmentally friendly products.

However, when buying decisions are ultimately made, only about 10% of those who say they are willing actually become real consumers who will pay extra to purchase "green" products. Environmentalists use the higher survey numbers to show that there is an unfulfilled demand for green products. However, businesses that make and sell these products regularly confront the reality of the lower, true market share numbers.

One item that is high on every environmentalist's wish list is an electric car. It turns out that almost everyone would like an electric vehicle that would free them from the necessity to buy gasoline. However, when they learn what they would have to give up in terms of cost, mobility, power, range, carrying capacity, and comfort compared with a conventional vehicle, their interest wanes.

Climate change is fundamentally an energy-economy-environment issue, with potentially profound implications for the growth and direction of our society.

Environmentalists are fond of pointing out that, with 5% of the world's people, the US emits 25% of the world's greenhouse gases. What they neglect to say, however, is that the US also produces about 25% of the world's goods and services, and the rest of the world is striving mightily to reach the US standard of living.

In spite of the seemingly definitive pronouncements made in the Summary for Policy Makers about the IPCC climate science assessment report, the science of the global climate, as described in the underlying working group documents, remains considerably more uncertain.

As climate knowledge grows, new questions and uncertainties continue to be uncovered. We need to focus our attention on reducing these uncertainties before committing to costly programs that may have irreversible implications for our economy and society.

What's wrong

Kyoto was stillborn in 1997. Even the Europeans gradually began to realize that they would be unable to achieve their own commitment to reduce greenhouse gas emissions by 2010.

That may have been why, after what seemed to be a successful all-night negotiating session last November in The Hague, the EU reneged on the agreement that had been reached. However, by failing to communicate clearly on this issue, the US has given the EU an opportunity to deflect the blame for failure and to portray the US as the one blocking progress on climate issues.

Kyoto was doomed primarily because it tried to set aggressive short-term goals to solve a long-term problem.

There is nothing intrinsically wrong with the differentiated responsibilities called for in the UNFCCC. However, when these differentiated responsibilities are translated into specific goals, in order to be fair, the hardships they impose must be similar for all participants.

From the beginning, it was evident that the US would have the most difficulty meeting its target and that the target would impose by far the highest costs on the US economy.

Another major failure of Kyoto was that it focused primarily on penalizing failure rather than rewarding progress. It would have created a new bureaucracy to police compliance with the treaty obligations. Their experience with such command-and-control regulatory approaches made those who would ultimately be responsible-largely businesses-justifiably skeptical about the whole process.

The Kyoto approach also made it logical for investors to defer projects designed to reduce emissions at least until the regulatory regime became clearer. Kyoto, with its percentage-reduction approach, would have penalized progressive companies that acted right away, while benefiting companies that delayed making reductions until later when they would be counted.

Some companies nonetheless have announced voluntary greenhouse gas reduction programs in spite of these risks. Careful analysis, however, shows that by far the largest amount of greenhouse gas reductions will take place in the later years of the program, when the final rules of the game are likely to be better defined.

Although Kyoto contained some good ideas-namely the so-called flexible mechanisms-environmentalists and Europeans worked ceaselessly to restrict their use by making the implementation regulations as complicated as possible. Rather than encouraging behavior that reduces emissions, they were trying to penalize it. At times, it seemed as if inflicting economic pain was a larger goal than reducing greenhouse gas emissions.

The concept behind the flexible mechanisms recognizes that, in a global issue like greenhouse gas emissions, the climate does not care where or how the reductions are made. From the perspective of the planet, all emissions reductions are created equal. Joint Implementation and the Clean Development Mechanism were designed to encourage international cooperation in order to make the most effective and least costly reductions first, re- gardless of their location.

Emissions trading was then going to make it possible to move excess earned credits to other countries in order to meet the commitments of nations having few or only high-cost greenhouse gas reduction opportunities. Countries that could economically generate emissions reduction credits in excess of their commitments would be able to sell them, at a fair market price, to countries with needs in excess of their ability to make cost-effective reductions.

Of course, no country would be forced to sell its excess credits if it didn't think the price was right. After all, a market transaction is one that makes both buyer and seller better off. If it doesn't, it doesn't take place.

What now?

The current administration has unnecessarily antagonized others in the way it announced its decision to terminate the Kyoto process. Everyone knew that Kyoto was dead, but, as at any funeral, it is necessary to be discreet in one's remarks about the deceased.

It is also important, when terminating one program, however ill-conceived, to propose an alternative. Some thoughts to consider in the formulation of a post-Kyoto climate policy:

• Encourage activities and investments that result in more-efficient use of energy and lead to long-term reductions in greenhouse gas emissions.
• Begin rewarding good behavior immediately by crediting all efforts to reduce greenhouse gas emissions and give credit for any reductions made since some base year (Kyoto stipulated 1990, but that is now open for discussion).
• Focus on the most potent greenhouse gases such as methane first, deferring major energy-related efforts to reduce carbon dioxide emissions at least until new, cleaner energy sources are available commercially.
• Use markets and market prices to improve energy efficiency-to achieve reductions in greenhouse gas emissions and to develop consumer awareness of the real costs of the program.
• Make sure end-users have the information needed to make good energy use decisions. Do not hide the costs and benefits of greenhouse gas reduction efforts in the cost structure of the companies providing energy services.
• Start right away to use the flexible mechanisms of Kyoto to the maximum extent and with as few restrictions as possible in order to begin making real reductions as quickly as possible.
• Recognizing that economic growth is the highest priority for much of the world, work with developing countries to apply new, more-energy-efficient technologies that will help reduce the rate of growth of their emissions.
• Continue to support development of im- proved energy production and consumption technologies in order to ensure that our energy supply and use system is as efficient as possible.
• Enhance efforts to deepen our understanding of the earth's very complex climate system and improve our ability to avoid, mitigate, or adapt to changes in climate that will undoubtedly come-for whatever reason-in the future as they have in the past.

Based on the historical record, climate change is inevitable. Earth's climate is always varying, and the evidence suggests that humans are now probably having some impact. We need to devise ways to minimize this impact as well as to be prepared to adapt to whatever changes do come.

At the same time, we have an obligation to future generations to provide them not only with the environment they deserve, but also with the technologies and wealth they will need to deal with problems that we can't even begin to foresee today.

What has been sorely lacking so far in the climate change debate has been a reasoned explanation of the entire story. It's a good one. Learning about the complexities of earth's climate is leading to a new and fascinating science. Understanding the real options available to influence these climate processes is still in its infancy.

It is essential to understand both the risks and the costs of actions taken now vs. actions taken later. In the face of uncertainty, precipitate action may be very costly. Delaying action pending better understanding may be a far better solution.

Furthermore, allowing time for existing equipment and factories to reach the end of their economic lives makes the transition to new processes much less expensive. Arbitrarily making everything we own today obsolete is not the prescription for economic success.

Unfortunately, the climate change debate has often had the air of a "'tis or taint" argument leading to little understanding of the participants' various views. The solutions proposed have often been based on an underlying agenda that uses climate change mitigation as a convenient driving force to achieve other goals.

Right now, the public is generally unconcerned by and uninvolved in the climate change debate. They tend to be vaguely aware that something is going on, but have been immunized by experience against some of the more hysterical cries of impending doom. In communicating, it is important to make sure that the goals of any climate change mitigation program and the related implications for economic growth, standard of living, and changes in lifestyles are well understood.

When people understand this, they will support and follow a long-term program designed to ensure continued economic growth at the same time it is reducing human impact on the climate. Then the entire world will benefit.

The author