Buenos Aires climate change meet unlikely to achieve breakthroughs

Patrick Crow
Energy Policies Editor

The world's nations will resume negotiations this week in Buenos Aires on unresolved aspects of the Kyoto climate change protocol, while debate continues on the economic and scientific effects of the treaty.

The U.S. will continue attempts at Buenos Aires to persuade developing countries, exempted by the Kyoto pact, to limit their emissions of gases, primarily carbon dioxide, that have been linked by some to a predicted catastrophic global warming.

Meanwhile, the U.S. Energy Information Administration has undercut estimates by the administration of President Bill Clinton of what the protocol will cost the U.S. economy.

The global oil and gas industry continues to grapple with what all this means. Few expect any significant breakthrough at Buenos Aires in efforts to hammer out a treaty acceptable to developed and nondeveloped nations alike.

However, any significant momentum that follows the Kyoto protocol could ultimately lead to dramatic changes in the landscape of the 21st century energy industry, especially in the outlook for fossil fuels.

The protocol

The Kyoto treaty calls for the U.S. to cut greenhouse gas emissions by 7% from 1990 levels by 2008-12. The agreement has yet to be ratified by the U.S. Senate (OGJ, Dec. 22, 1997, p. 17).

Article 3 and Annex B of the protocol established binding emissions targets below 1990 levels for 38 developed nations and the European Union for 2008-12.

Japan agreed to a cut of 6% below 1990 levels, and the EU agreed to a cut of 8% (but grouping the EU nations, which allows for wide variations among member countries).

Several nations will be able to increase emissions (Australia 8% above 1990, and Norway 1%) while several others (Russia, Ukraine, New Zealand) must return only to 1990 levels.

Overall, the 38 developed countries must reduce their emissions about 5.2% from 1990 levels.

The pact covers six major greenhouse gases: CO₂, methane, nitrogen oxides, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. It sets 1990 as the baseline year for the first three and 1995 for the last three.

Article 3 allows the counting of net changes in sinks "resulting from direct human-induced land use change and forestry activities" since 1990, but details have not been determined.

The U.S. sought and won Article 17, which allows emissions trading between developed nations, and Article 6, which permits joint implementation of reduction programs.

Article 12 established a "clean development mechanism" (CDM), which gives developed countries a credit toward their targets through project-based emission reductions in developing countries. Details still must be negotiated.

U.S. stance

President Clinton and Vice-President Albert Gore have said the administration won't submit the protocol to the Senate for ratification until there is "meaningful participation by key developing countries."

At least two of those nations, China and India, strongly oppose new commitments under the protocol.

The Republican-controlled U.S. Congress appears to oppose the treaty. In July 1997, the U.S. Senate passed a resolution 95-0 opposing the protocol if developing nations also did not reduce their emissions.

The Clinton administration has yet to outline a firm plan of how the U.S. would comply with its reductions, which could be up to 30% in a 10-15 year period.

Because the U.S. is the world's largest energy consumer, its participation is necessary for the protocol to be a practical success.

But to take effect, only 55 nations that collectively account for 55% of the 1990 CO₂ emissions of developed countries need to accept the protocol. It was opened for signatures Mar. 16 and closes Mar. 15, 1999.

Some of the U.S. opposition is based on the fear that the protocol would infringe upon U.S. sovereignty, because it requires international reporting and review of implementation. Those details are to be resolved when the protocol takes effect.

Pre-meeting

On Sept. 17-18, ministers from 22 industrialized and developing nations met in Tokyo to prepare for the Buenos Aires talks.

Jose Israel Vargas, Brazil's science and technology minister, told the meeting that the major industrialized countries will have to spend $100 billion/ year to meet their commitments under the Kyoto Protocol.

He added that the amount was less than half of 1% of the countries' combined economic output.

U.S. Undersecretary of State Stuart Eizenstat said, "In our meetings, the U.S. made it clear that developing countries must be part of the solution. Meaningful participation by key developing countries is central, with their degree of commitment dependent upon their emissions level and state of development."

That signaled that the U.S. had relaxed its demand that most developing countries commit to legally binding reductions.

Eizenstat said the U.S. expected developing countries with strong economies-such as South Korea, Mexico, and Israel-to accept legally binding emissions reductions targets, but not poor nations such as India or China.

He said that, if the poorer nations had sound environmental and economic policies and participated in the CDM, the U.S. would see that as a meaningful contribution.

The CDM would allow industrialized nations to fund pollution abatement schemes in developing countries and count the resulting drop in emissions towards their own Kyoto reductions targets.

That's important, because developing countries are expected to produce 50% of the world's greenhouse gas emissions sometime after 2015. The CDM would involve them in the global warming control effort without curbing their economic progress.

The EU urged the U.S. to sign the protocol regardless of acceptance by developing countries. EU Environment Commissioner Ritt Bjerregaard said, "We would like to see the U.S. sign the protocol as soon as possible."

She said industrialized countries should demonstrate their commitment to reduce greenhouse gases before expecting developing countries to do the same.

Bjerregaard said delegates at the Tokyo meeting agreed to seek an action plan at Buenos Aires, which would detail concrete measures and a time frame for implementing the Kyoto Protocol. They also agreed to draft flexible mechanisms for achieving the legally binding targets.

Agenda

The official Buenos Aires agenda focuses on three mechanisms in the Kyoto Protocol that were intended to help developed countries reduce the costs of reaching their combined 5% emissions-reduction target in 2008-12.

The protocol's international "emissions trading" program would let developed countries that reduce emissions beyond their agreed target sell the excess emissions credits to others.

Nations disagree on whether there should be a concrete ceiling on how many credits a country can buy or sell. And some are concerned that some countries will be able to meet their targets with minimal effort and could then sell large quantities of emissions credits (known as "hot air") to others, reducing pressure on some industrialized countries to make domestic cuts.

The CDM would enable industrialized countries to finance emissions-avoiding projects in developing countries and receive credit for doing so.

The U.N. said, "This will be an important new avenue through which governments and private corporations can transfer and promote clean technologies."

The "joint implementation" mechanism will provide a credit for investments in projects, but only in other developed countries. Reporting rules, comparable methodologies, and project guidelines must still be established.

The Buenos Aires conference also will work to find practical means for promoting the transfer of climate-friendly technologies to developing countries. Decisions are also needed on guidelines under which developing countries will report data on their greenhouse gas emissions and climate change programs.

Another unresolved issue from Kyoto involves "sinks," mostly forests, which can be planted to absorb CO₂ from the atmosphere and help to reduce net emissions. After heated debate, the Kyoto pact included certain sinks, but there are problems in measuring their contribution.

The U.N. said, "Many developing countries resist formal commitments, even if voluntary, that would put an upper limit on their emissions, noting that their per-capita emissions are still low compared with those of developed countries.

"Nevertheless, the host government of Argentina has requested that an item on voluntary commitments be placed on the agenda. This issue is likely to generate some of the most intense debate of the meeting."

Strategy

At a recent hearing, Melinda Kimble of the U.S. State Department warned U.S. congressional representatives not to expect too much from the Buenos Aires meeting.

Kimble, acting assistant secretary for oceans and international environmental and scientific affairs, said, "We view Buenos Aires as a stepping stone to future efforts on climate change. Breakthrough accomplishments and headline-making events, however, are not likely."

She said the administration hopes to make "incremental, but credible, progress" on issues such as emissions trading and obtaining "meaningful participation" from key developing countries.

She said efforts would be made to educate China, India, and other nations about how CDM could benefit their economies.

Also at the hearing, Janet Yellen, chairman of the Council of Economic Advisers, defended White House cost estimates for implementing the Kyoto Protocol, saying meeting targeted cuts would cost $7-12 billion/year in 2008-12.

She said that increases in energy prices to pay for emissions permits would raise the average household's energy bill in 2010 by $70-110/year, and gasoline prices by 4-6¢/gal.

She said the administration's "modest" cost estimates assumed that international emissions trading permits would be in place, along with joint implementation programs and "meaningful participation" by nations such as China and India.

EIA study

The EIA has disagreed with the White House on costs.

It issued a study that claims the U.S. may need significant energy price increases in order to meet its tentative commitments under the Kyoto pact.

The EIA study, "Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity," was prepared for the House science committee.

It said that, because 83% of U.S. greenhouse gas emissions in 1990 were CO₂ released by energy use, any actions to cut them would significantly affect energy markets.

EIA examined six cases with different reductions in energy-related carbon emissions.

In the case with the highest target, carbon emissions are reduced by an average of 122 million metric tons/year relative to the projected baseline emissions in 2008-12, which allows an increase of about 24% from 1990 levels.

For the lowest target, emissions are reduced on average by 542 million tons relative to the baseline, or 7% below 1990 levels.

Each case implicitly assumes different levels of international actions, offsets, or sinks, but they were not quantified. To reduce energy-related carbon emissions, EIA added a carbon price to the price of delivered energy fuels based on their carbon content.

Conclusions

EIA said that what the Kyoto Protocol will cost the U.S. economy will depend on the international permit trading system, on projects to reduce emissions or develop sinks in other countries, and on U.S. actions to reduce other gases and develop sinks.

"These actions may reduce compliance costs by offsetting reductions in energy-related carbon emissions. The carbon price required to reduce U.S. energy-related carbon emissions ranges from $67 to $348/metric ton in 2010 (1996 dollars).

"In the more stringent reduction cases, the carbon price will decline by 2020 as more efficient and lower-carbon technologies become economically available and penetrate later in the forecast horizon."

EIA said that, due to the carbon price increase, the average price of gasoline could be 14-66¢/gal higher in 2010 than it would be otherwise, and electricity prices could increase by 20-86%.

It said that higher energy prices would encourage U.S. consumers to reduce energy use by 4-18% in 2010, relative to the baseline. EIA said that energy consumption will increase during 2010-20 as the economy grows and carbon prices decline.

Petroleum consumption would be lower than it would be without carbon reductions but will remain above current levels because of the demand for oil in the transportation sector, where there are few options for other fuels.

Gasoline consumption could be 3-18% lower in 2010 compared with the baseline, and jet fuel consumption lower by 1-16%.

EIA said that, because coal is the most carbon-intensive fossil fuel, its price could rise 153-800% in 2010 relative to baseline projections, and coal use will be reduced by 18-77%, particularly for electricity generation.

Natural gas and renewables would replace coal in electricity generation, and gas use would increase by 2-12% in 2010 vs. the baseline.

Renewables would capture 11-22% of the power generation market by 2020, relative to 9% in the baseline, with major increases coming in wind, biomass gasification, and geothermal sources.

EIA said higher carbon prices would make nuclear generation more economic and would extend the operating life of existing plants, raising nuclear power generation by 8-20% in 2010.

Economic effects

EIA said that, when energy costs rise, other factors of production, including labor and capital, become relatively less expensive. Energy price increases encourage adjustments in which labor and capital are substituted for more expensive energy.

In the process, some economic potential is lost, which could reduce the "potential" GDP from a growth rate of 2%/year during 2005-10 in the baseline to 1.9%/year.

It said that recycling carbon revenues back to consumers will offset some of the negative effects on the economy. In the baseline, GDP grows at an average 2%/year during 2005-10.

As a carbon price increase is introduced, the average growth could be reduced to 1.6%/year, assuming a Social Security tax rebate, or to 1.2%/year, assuming a personal income tax rebate.

As carbon prices decline and the economy adjusts, GDP rebounds and the average growth rate during 2005-20 is only slightly less than in the baseline.

The loss in GDP, plus the funds used to purchase permits internationally, represent the total cost to the economy.

EIA said that, during 2008-12, the cost ranges from $77 billion/year (1992 dollars) to $338 billion/year, depending on the level of carbon reductions and the recycling assumptions. This cost is relative to a total economy of $7 trillion in 1996, growing to about $9.5 trillion in 2010, and about $11 trillion in 2020 (1992 dollars).

Reactions

Rep. James Sensenbrenner Jr. (R-Wis.) said, "I've suspected all along that the White House position on the Kyoto Protocol is unrealistic and untenable, and this EIA study confirms my suspicions.

"We now know the real story behind the Kyoto Protocol: Energy use will be more expensive, economic growth will be jeopardized, and American families will pay dearly for a flawed treaty. The administration tries hard to gloss over these fatal flaws, but it cannot sugarcoat the harsh realities that it would inevitably bring to our economy and our way of life."

The Global Climate Coalition said that the EIA report "injects a dose of reality into the administration's analysis of the economic effects of the Kyoto Protocol."

It said the EIA findings for 2010 are significantly different from those Yellen has given Congress at several hearings.

The coalition noted that EIA estimated the protocol would raise energy costs for U.S. households by $335-1,740/year vs. the administration's estimate of $70-100/year.

Also, it noted EIA predicted gasoline costs could rise by as much as 66¢/gal, while the administration estimated a hike of no more than 5.5¢. And EIA said the GDP would decline by $61-397 billion, while the administration estimated $1-5 billion.

Connie Holmes, GCC chairman, said, "This EIA analysis verifies our doubts about the administration's claims of modest economic impact. Even if the administration is successful in obtaining an international agreement to trade emissions, the costs will be high."

But Howard Geller, executive director of the American Council for an Energy-Efficient Economy, said the EIA study was flawed, because it did not account for continuing or likely policies, programs, and associated technological trends that will lead to reductions in carbon emissions.

Geller said some examples are forthcoming appliance efficiency standards, tougher Clean Air Act standards that have been announced or are being implemented, programs that expand utility investment in energy efficiency and renewable technologies, voluntary energy efficiency programs, and the growing willingness in the private sector to take early action and make voluntary greenhouse emissions reductions.

Geller said EIA assumed the U.S. would wait until 2005 to begin emissions reductions, ignoring voluntary commitments and early action.

And he said EIA failed to include a scenario in which the U.S. used policies other than a carbon tax to comply with the protocol. He said such policies could include minimum energy efficiency standards, tax incentives, revenue-neutral fees and rebates, and federal utility restructuring legislation with energy efficiency requirements.

Legislation

Some lawmakers are worried the Clinton administration plans to comply with the protocol-with or without Senate ratification.

Rep. Joe Knollenberg (R-Mich.) has charged that the U.S. Environmental Protection Agency wants to have CO₂ declared a hazardous pollutant, allowing the agency to regulate emissions and enforce Kyoto goals on its own.

In October 1997, President Clinton proposed a program to improve U.S. energy efficiency and reduce its greenhouse gas emissions. It would call for spending $6.3 billion over 5 years to provide incentives for industries, businesses, and consumers to make and purchase more energy-efficient products.

For fiscal 1999, those programs were funded at slightly more than $1 billion, a compromise that was $120 million more than Congress wanted but $300 million less than the administration sought.

Before adjourning, Congress approved an amendment to block the Clinton administration from a "back-door implementation" of the treaty.

GCC said, "This puts Congress clearly on record opposing implementation of the Kyoto Protocol without Senate consent," preventing actions such as EPA regulating CO₂ as a hazardous pollutant.

The amendment permits agencies to continue programs implementing U.S. commitments under the 1992 Climate Change Convention, climate research programs, or energy efficiency programs.

The Clinton administration denied it intended an "end run," saying it only wanted to continue greenhouse gas programs unrelated to the treaty.

Todd Stern, the White House coordinator for climate change, said, "We have never had any intention of implementing the Kyoto Protocol before it is ratified."

Pew study

The Pew Center on Global Climate Change, which advocates market solutions for global warming, recently urged Congress to enact laws to encourage U.S. companies to reduce greenhouse gas emissions.

Executive Director Eileen Claussen said, "The cost of delay is significant, both in terms of the economic and environmental consequences. The problem is getting worse, and the longer we wait, the more difficult and expensive our response will be.

"Regardless of any eventual international framework, the U.S. can take steps to credit reductions in gases now, and therefore encourage and reward companies that act to minimize their emissions."

The Pew report said that a workable early action program requires Congress to give companies a predictable credit mechanism and a clear legal framework.

It said the program must be simple and flexible, reward only real reductions, recognize past voluntary greenhouse gas reductions, not exceed the U.S. greenhouse gas allocation, and not predetermine the eventual domestic regulatory program.

Sens. John Chafee (R-R.I.), Connie Mack (R-Fla.), and Joe Lieberman (D-Conn.) filed a bill late in the session to credit companies for taking voluntary steps to reduce their overall gas emissions in advance of a regulatory program. It did not pass but is expected to be reintroduced next session.

The Interstate Natural Gas Association of America called the bill "a forward-thinking, practical first step in addressing the issue, and it provides incentives to move toward the use of cleaner fuels."

Marketing problems

The Emissions Marketing Association, Milwaukee, has warned that trading of greenhouse gas emissions credits should be kept on the open market rather than in a private trading system proposed by the U.N.

EMA is a consortium of emissions brokers, traders, utilities, consultants, oil and coal companies, and government representatives.

It said it was "deeply concerned" by the U.N. Conference on Trade and Development and the Earth Council's plans to sponsor an organization that would establish a private or members-only greenhouse gas emissions trading market.

The organization, the International Emissions Trading Association (IETA), would be dedicated to advancing emissions trading and certifying its own members' greenhouse gas emissions reductions.

Emissions credits represent a market-based approach to reducing greenhouse gases. Companies that meet emissions standards through upgraded equipment or better fuel efficiency could sell their excess "paper" shares of compliance to companies that find it cheaper to buy credits in the open market rather than comply with the standards.

"The IETA clearly overextends itself and, by seeking to establish a closed trading system, could actually stymie the development of a robust greenhouse gas emissions trading market," Andrew Ertel, EMA vice-president, said.

"It is highly inappropriate at this formative stage of international emissions trading for a U.N.-sponsored, fee-based membership association to take the role of both forming and managing a closed market," he added.

Roundtable report

A recent Business Roundtable report catalogs the problems created by the protocol, noting it "raises many more questions than it answers and leaves too many gaps unfilled."

The paper also said the protocol "fails to address the global nature of the issue, (and) we are still unable to assess the full economic ramifications."

The Roundtable, an association of 200 CEOs, said, "The protocol mandates an unprecedented 41% reduction of greenhouse gas emissions by 2008-12 for the U.S. from the business-as-usual path."

It said EIA projects that U.S. emissions will be 34% above 1990 levels by 2010. "Thus, what may superficially seem to be a modest 7% reduction below 1990 levels becomes, in real terms, a legal obligation for the U.S."

The Roundtable said that the reduction "is the equivalent of having to eliminate all current emissions from the transportation, utility, or industry sectors."

It said, "Without full participation by developing countries, the Kyoto Protocol will not lead to a net reduction of global emissions," and the treaty allows "differentiated targets" for nations, which potentially could put the U.S. at a disadvantage.

It said that the variable targets weren't based on criteria such as countries' growth, energy use, or energy efficiency and "as a result, some countries will be able to continue to increase their emissions."

The Roundtable said that use of a 1990 emissions baseline is unfair to the U.S. because that was a recession year and economic growth since then has contributed to an increase in emission levels.

New studies

The magazine Science recently reported North America is absorbing much of the carbon scientists had expected to find in the atmosphere.

CO₂ in the air has been increasing, but not as rapidly as global warming researchers expected. They have been trying to determine where the excess has gone.

Science said they think much of the missing carbon is being absorbed in North America-possibly by regrowth over abandoned farms and previously logged forests.

The absorption could total 1.2-2.2 billion tons/year, a "substantial portion" of the carbon being added to the atmosphere.

The magazine also reported that scientists, using instruments the U.S. Geological Survey developed, have accurately determined temperature changes at a site in central Greenland during the last 50,000 years, through the end of the last ice age.

Previous studies using plant pollens stored in lake sediments, chemical isotope ratios stored in glaciers, and various other climate indicators, have shown that past climates have been warmer and colder than the present.

Temperatures during the Little Ice Age (1420-1890 AD) were found to be 2° F. colder than present in central Greenland. In contrast, temperatures were 2° warmer than present during the Medieval Warm Period, 1,000 years ago when the Vikings established settlements in Greenland, and 5,000 years ago were 4.5° warmer. The last ice age, about 22,000 years ago, was found to be extremely cold, with temperatures dipping to 41° below current values.

Meanwhile, the U.S. National Oceanic and Atmospheric Administration (NOAA) said September 1998 was the hottest on record, making 9 consecutive months of record heat.

It said the average worldwide temperature for the month was 59.98° F., 1.08° above the 1880-1997 global average of 58.9°.

Thomas Karl, director of the National Climatic Data Center in Asheville, N.C., said, "The recent string of unusually high global average temperatures could be a sign of accelerated global warming. However, these records will not continue indefinitely because of the impacts of normal climate variability."

NOAA also said that the recent warm months have also been blamed on the heating of the Pacific Ocean in the El Niño phenomenon, but that is now easing.

Canada's plans

Canadian Environment Minister Christine Stewart said in late September that her government is studying a domestic emissions-trading system to cut greenhouse gas emissions.

Stewart said the Canadian plan could serve as a model for other nations: "I would say, internationally, we are leading the way in the work that we are doing on this. There's an urgency for us to take early action and get on with it."

She said that a domestic trading system would require a regulated cap on greenhouse emissions, a step beyond the government's current policy of relying strictly on voluntary measures.

Under the Kyoto Protocol, Canada has pledged to cut greenhouse emissions to 6% below 1990 levels by 2012.

Stewart said the government is not satisfied with what companies have achieved so far in their voluntary efforts to curbing the greenhouse gas emissions.

A recent report by the Pembina Institute for Appropriate Development, Calgary, said 82% of Canada's top companies are not participating in the voluntary program, and only a few dozen have submitted plans to achieve emissions cuts.

Just 35 of the 708 companies participating in the "climate change voluntary challenge and registry program'' received a passing grade from the institute.

Petro-Canada Ltd. reported in mid-October that it reduced its 1997 greenhouse gas emissions by 2.8%, despite increased production of oil, natural gas, and refined products.

Initiatives eliminated 79,800 tons/ year of CO₂-equivalent emissions from continuing operations through upgrading of equipment and operating practices.

Other nations

The Japanese government will propose a plan at Buenos Aires to provide developing nations foreign aid as incentives to cut greenhouse gas emissions.

The CDM program also would have industrialized nations help developing countries improve the fuel efficiency of thermal power plants, start forestation programs, and the like.

Under an emissions trading system, the developing nations would then sell part of the resulting emission cuts to industrialized countries, so that those nations could include the reduction figures in their attempts to cut greenhouse gases.

EU environment ministers early in October accepted an offer from EU carmakers to voluntarily cut 25% of CO₂ from car exhausts over the next decade.

The offer, which the automakers made to avoid binding legislation, would cut average car fuel consumption to 5.8 l./100 km by 2008, which is expected to reduce CO₂ emissions from new cars to 140 g/km from the current 186 g/km.

Meanwhile, the International Energy Agency has questioned the U.S. ability to comply with the Kyoto agreement.

It said that the Clinton administration's reliance on technology and tax credits to curb emissions of the "greenhouse gas" were unlikely to produce the required reductions.

For the U.S. to achieve its goal of a 7% cut, IEA said it needed to complement the measures it planned with higher taxes on energy prices, or at least a tax on carbon emissions.

Predictions

GCC's Holmes predicts the Buenos Aires meeting would be far different from Kyoto. "It will be more of a business meeting, and not a marathon negotiating system."

Holmes said the focus most likely would be on establishing a work plan for developing rules for emissions trading, and the CDM program.

"The U.S. should be very pleased if they get a work plan for those rules, or even an outline of what they're going to talk about."

She predicted the delegates would agree on the opening day to discuss participation by developing countries, but "the issue is so extraordinarily controversial, they'll delegate it to a working group and put it in the background so they can achieve other things."

Holmes said, "I'm sure they'll be some surprises of some sort coming out of this meeting, but it's hard to know what's in store."

Although Clinton doesn't plan to send the Kyoto Protocol to the Senate for ratification in the foreseeable future, Holmes predicted he would sign it by Mar. 16.

She said that gesture may occur just after the November congressional elections-and during the Buenos Aires meeting-"because other nations have been criticizing the U.S. for not doing anything on the global warming issue."