Memorandum submitted by Steve Rayner,
James Martin Professor of Science and Civilization Director, James
Martin Institute University of Oxford
THE AUTHOR
Steve Rayner is James Martin Professor of Science
and Civilization and Director of the James Martin Institute at
the University of Oxford. He is a member of the Royal Commission
on Environmental Pollution, a Lead Author on Working Group III
of the Intergovernmental Panel on Climate Change, and also serves
as Director of the Economic and Social Research Council's Science
and Society Research Programme.
Rayner spent two decades working in leading
research institutions in the United States, much of which was
devoted to research on the human dimensions of global environmental
change with a particular emphasis on climate. He is co-editor
of an extensive review of social science research on climate change,
the four volumes of Human Choice and Climate Change (Battelle
Press 1998). He is also co-author of the book Making Markets.
He has led the writing of various reports to the Congress
of the United States on climate policy instruments and has presented
testimony to the US Congress on climate research policy.
He writes here in a personal capacity.
THE INTERNATIONAL
CHALLENGE OF
CLIMATE CHANGE:
UK LEADERSHIP IN
THE G8 AND
EU
This memorandum to the Environmental Audit Committee
of the House of Commons consists of two parts, broadly following
the structure of questions accompanying the committee's invitation
to submit my views. The first section addresses the general strategic
questions about what the UK climate change priorities should be
during its presidency of the EU and G8. Part II addresses some
of the issues facing the global emissions trading system envisaged
in the architecture of the Kyoto Protocol and briefly reviews
alternatives to such a system.
PART I: GENERAL
STRATEGIC QUESTIONS
What priorities on climate change should the UK
pursue prior to and during its presidencies of the EU and G8 in
2005? To what extent should the primary focus be on a post-Kyoto
framework? Are there any other short or medium term issues that
should be part of the UK agenda? If so what?
The UK presidency of the EU and G8 presents
an important opportunity to move on from the current emphasis
on the Kyoto mechanisms and to develop other strategies to deal
with both the causes and impacts of climate change that are capable
of engaging critical actors in the United States.
The Kyoto Protocol was an agreement of historic
proportions, signalling that governments around the world were
ready to take climate change seriously. However, it is also an
intrinsically problematic mechanism for bringing about the kinds
of changes in the global energy system that will be required to
stabilize anthropogenic greenhouse gas concentrations over the
course of the next century and to protect vulnerable human and
natural populations from climate change impacts.
Many of these problems were identified even
before the protocol was formulated in 1997, but were glossed over
in the rush to secure a diplomatic success that has yet to translate
into meaningful emissions reductions. As various commentators
have observed, the current architecture for an international climate
policy regime was based on that achieved for the protection of
the stratospheric ozone level. But, despite some obvious superficial
parallels, the scientific, technical, and political structure
of the ozone and climate problems is quite different. As a consequence
the world has committed itself to a framework for climate policy
that, in many respects, may be quite unsuited to the problem.
It seems to be a classic case of the phenomenon observed by military
historian Gwynne Dyer, that generals invariably try to fight the
next war with the technologies and strategies that won the last
one.
However, there is an aspect of the ozone regime
that is often overlooked when considering it as a precedent for
a climate regime. We should remember that the Montreal Protocol
itself was a response to the diplomatic failure to conclude an
international ban on CFCs as aerosol propellants under the terms
of the earlier Vienna Convention on Protection of the Ozone Layer.
Most experts on the ozone regime agree that the much more radical
provisions of the Montreal Protocol and succeeding agreements
would not have been achieved so rapidly had the aerosol ban been
achieved. It is conceivable that a more effective regime could
emerge from recognizing the failure (or at least, the serious
limitations) of the Kyoto Protocol than from its success.
No-one suggests that the global emissions reductions
envisaged in the Kyoto targets will come anywhere close to limiting
emissions at levels that would stabilize anthropogenic greenhouse
gas concentrations. The short-term targets give the appearance
of serious action, but gloss over the absence of any viable plans
for compliance at these levels, let alone those that would come
into force with the inevitable tightening of targets. It has been
pointed out that, even if all the current Kyoto commitments were
met, it would require some 30 repeat performances to reach this
goal. At the current rate of 7-10 years for each phase, we would
achieve the goal of atmospheric stabilization in 200-300 years!
Clearly this is not an acceptable strategy. We are told that "a
journey of a thousand miles begins with a single step" and
that targets in future reduction periods will have to be ramped
up (always assuming that the first step has in any case taken
us in the direction that we wish to go). However, there has been
no serious analysis of the political viability of the kind of
radical correction to targets and timetables that would be required
for emissions trading to deliver the goods in a more timely fashion.
The recent UK experience of negative reaction to policy-driven
increases in petrol prices is not encouraging.
Even the assumption that an inclusive global
treaty is required to curb the growth in greenhouse gas emissions
may be questionable. Considering the EU as a single entity, the
international political units that really count in terms of emissions
controls are fewer than 10. In addition to the EU these include
at least the USA, Russia, China, India, Brazil, and Indonesia.
Relying exclusively on an international agreement system that
requires the agreement of 185 national governments inevitably
results in the very lowest of common denominators.
Of the units that count, the USA remains the
largest per capita and total emitter of greenhouse gases. Yet
the Kyoto Protocol was dead on arrival at the Clinton White House,
as it was abundantly clear that it would never be ratified by
a Senate that in 1997 had already voted by 95-0 to reject any
treaty that did not require developing country parties to reduce
their emissions in the same compliance period. For domestic political
reasons, President Clinton chose to keep the corpse on ice in
the hope of future resuscitation until President Bush, with an
eye to a different political constituency, sent it off for burial.
It is not really conceivable that the USA is going to ratify Kyoto
in the foreseeable future, so there is a clear and present need
to find alternative means to engage critical actors in the US
in efforts to combat climate change.
There are many opportunities to do this if we
are willing to recognize the realities of US political culture.
It is encouraging that about 60% of Americans responding to opinion
polls have stated that climate change is a significant global
problem that requires attention. However, only 40% believes that
such action is primarily a matter for the Federal Government.
A continued focus on engaging the US government in the formalities
of Kyoto can only continue to distract international efforts from
engaging with Americans on levels other than national governments.
Some US State governments are contemplating civil law suits against
electric generating companies to recover the costs of adaptation
to climate change to which their activities have already contributed.
The threat of civil liability may prove to be a much more powerful
incentive to the US electric utility industry to reduce its emissions
than the distant threat of incremental Federal regulation. California
is the world's sixth largest economy. Appliance and vehicle efficiency
standards in California become the de facto standards for the
entire USA. Nine Northeast and Mid-Atlantic states are currently
putting together their own regional cap-and-trade system to reduce
greenhouse gas emissions known as the Regional Greenhouse Gas
Initiative (RGGI), raising the possibility that the US could develop
a robust domestic climate policy without the intervention of the
Federal Government.
Britain could use its leadership of the EU and
G8 to encourage regional policy responses outside the Kyoto framework
(for example the RGGI) as well as within it (for example the EU
emissions trading scheme).
The various initiatives being developed by the
governments of certain US states clearly demonstrate that national
governments are not necessarily the most promising agents for
achieving effective climate policy. It also suggests that a regional
approach to climate change may be a way of building a global climate
regime from the bottom up. One might imagine an Asian climate
policy bubble or a Latin-American policy bubble. In every case,
the focus should be on progress towards the desired result of
stabilizing the concentrations of anthropogenic greenhouse gases
in the atmosphere, rather than on fetishizing any particular programme,
process, or protocol.
Unfortunately, support for Kyoto has become
a litmus test for determining those who take the threat of climate
change seriously. Between Kyoto's supporters and those who scoff
at the dangers of leaving greenhouse gas emissions unchecked,
there has been a tiny minority of commentators and analysts convinced
of the urgency of the problem while remaining profoundly sceptical
of the proposed solution. But their voices have largely gone unheard.
Climate change policy has become a victim of the sunk costs fallacy.
We are told that Kyoto is "the only game in town". However,
it is plausible to argue that implementing Kyoto has distracted
attention and effort from real opportunities to reduce greenhouse
gas emissions and protect society against climate impacts. While
it may not be politically practical or desirable to abandon the
Kyoto path altogether, it certainly seems prudent to open up other
approaches to achieving global reductions in greenhouse gas emissions.
Britain's leadership of the EU and the G8 is a golden opportunity
to establish some new games and open alternative, or at least
supplementary, paths to achieve climate policy goals. Britain,
in contrast to the US, has high credibility as a country that
has taken the challenge of climate policy seriously. It is therefore
well placed to introduce and support much-needed novel approaches
and measures into the international arena.
Policy makers should explore the possibility
that international competition could prove to be as important
as cooperation in progress towards lowering global carbon emissions.
The debate about climate change is no longer
about whether it is a real scientific issue, but about how society
should respond. All available strategies should be considered.
While cooperation is undoubtedly required at some levels of climate
policy, others may be more effectively advanced though competition.
Consider the following scenario. Regardless of Kyoto, the EU as
a whole decides to take advantage of the historic opportunity
to modernise its energy sector while the US continues along its
present path of relying heavily on coal and oil. Initially Europe
may experience some loss of competitiveness vis a" vis the
US. However, after a while the modernized EU economy would be
likely to outstrip the performance of the aging infrastructure
of the US (much as the West German economy did relative to the
UK during the post World War II recovery). This would provoke
the US to modernise its own energy sector to recover its competitive
position with respect to Europe. The result could be a much more
rapid reduction in greenhouse gas emissions than would be achieved
by endless rounds of tortured negotiations to set targets that
will always be the lowest common denominator.
I do not pretend to know the time scale of such
a scenario, let alone its probability, although I have canvassed
it among various experts on historical technological transformations
who assure me that it is quite plausible. It would seem to be
quite consistent with the steady 150-year global trend towards
decarbonisation of primary energy intensity (from 0.84 tons C
per kWyr in 1850 to less than 0.5 tons today.) The point is that
it would require cooperation at some levels (in this case, within
the EU) while relying on competition at others (between the EU
and the USA).
Of course, such a scenario does not depend on
the imposition of emissions caps or even explicit emissions targets;
rather, it takes advantage of the economic efficiencies that would
be achieved through greater energy efficiency. Rather than a restrictive
approach towards emissions, it approaches the policy goal indirectly
through a positive policy to encourage energy modernization. One
thing that social scientists have very hard evidence for is that
the framing of policies fundamentally shapes the choices that
people make. A positive approach towards energy modernization
is likely to be politically much more attractive (particularly
in the US) than one that is framed as a negative policy towards
greenhouse gases. It also asks less from people in terms of behavioural
change. Extending initiatives such as the UK's Carbon Trust across
the EU could be an important step towards the European action
necessary to initiate such a cycle of competitive modernization.
Regardless of the level of commitment to the
Kyoto mechanisms, it is imperative that the EU and G8 countries
reverse a decade of precipitous decline in public and private
sector investment in energy R&D. Achieving a significant reversal
of this trend would be the most significant single action by which
the UK could demonstrate international leadership and make an
indisputable contribution to any workable strategy to address
climate change.
Since the mid-1980s, the world has enjoyed cheap
and abundant fossil energy supplies. Technological advances, discoveries
of new petroleum resources, improved energy productivity, and
the creation of futures markets, have alleviated fears that the
world's energy future would necessarily be characterized by scarcity
and high prices. The widespread perception that energy has become
a matter of less urgency, relative to other social priorities,
has led to shrinking government budgets for R&D, which have
dropped by over 40% worldwide since 1980. The decline has been
particularly dramatic in Germany, the UK, and the USA, with the
largest hit being taken by the renewables sector.
At the same time, an ideological shift towards
deregulation of the energy sector in many industrialized countries
has placed additional pressures on private R&D investments.
The introduction of competitive forces has led to shrinking private
sector R&D budgets while remaining private sector resources
gravitate more often to lower risk, market-oriented projects than
to riskier projects with more distant payoffs.
This disinvestment in R&D could hardly be
happening at a less-opportune time for the pursuit of climate
change goals. Much of the electrical generating capacity in the
industrialized world is nearing the end of its useful life and
will need to be replaced in the next three decades. Europe alone
will need to replace over 200,000 Megawatts of capacity by 2020.
Without significant new investment in energy R&D, the technologies
upon which any emissions reduction strategy depends simply will
not be available at a competitive cost at the time when they could
make a significant difference. It is not that the technologies
are missing altogether, but that many of them lack the investment
needed to take them to the production levels that would make them
economically competitive. Such an investment could, in principle,
accelerate the move away from fossil fuels more rapidly than targets
and timetables.
It is also worth noting that over 60% of all
energy R&D undertaken around the world during the past forty
years has been spent on developing nuclear power. This might be
part of the solution, at least as an interim stop-gap technology,
provided that the nuclear waste issue could be resolved. To achieve
public acceptance, this would probably require the establishment
of secure, monitorable and retrievable waste storage, the capacity
of which would be strictly limited to accommodate only the waste
of any licensed new facilities.
Another stop-gap technology is carbon sequestration,
which could be used to buy time for an effective transition away
from intensive use of fossil carbon for energy. The investments
in this sector have been meagre, but the insurance value of such
investments could be quite substantial.
A mere 6% of the world's energy R&D budget
has been used to support renewable energy. Since only 10 countries
carry out 98% of the world's energy research, a concerted programme
of new investment in renewable energy is plausible. In principle,
this could be achieved without any need for international—let
alone global—treaties, as the government policies that are
needed mainly consist of domestic programmes to induce firms to
invest in renewable energy. At a minimum, the Presidency of the
EU and G8 could be used to encourage and support such programmes.
Some limited forms of international agreement
would probably be necessary to help transfer advanced, low-emitting
technologies to less industrialized countries so that they can
avoid following the carbon intensive development path. However,
these arrangements would be far less problematic than full implementation
of the Kyoto architecture. Rapid dissemination of advanced technologies
is essential. One approach might be to emphasize the world class
R&D capabilities of China and, increasingly, India, so that
they could be partners in this process. Such partnerships could
also have longer term economic advantages for the UK and EU as
these countries rapidly become more developed.
Policymakers in all countries must recognize
that the triggers and motivations for climate policy are inevitably
values based and cannot be provided by science.
The American political scientist, David Victor
cogently argues that caps on emissions only make sense "if
the objective of international efforts to slow global warming
is to avert a catastrophe that would be triggered by a certain
accumulation of emissions in the atmosphere." This is exactly
the rationale envisaged by the architects of the Framework Convention
on Climate Change (FCCC) and the Kyoto Protocol. Emissions would
be capped below the trigger point and trading would then provide
the most cost-efficient means of staying below the threshold.
However, the problem is how to establish a shared understanding
of what that threshold should be.
To date, the goals of climate policy have, somewhat
arbitrarily, focused on preventing atmospheric concentrations
of greenhouse gases from rising above 450 to 650 ppm of carbon
dioxide equivalent or alternatively above levels that would force
a global average temperature increase of 2 degrees C. However,
there is no strong scientific basis for choosing these particular
thresholds. They are certainly not ones associated with any specific
sudden dramatic event, such as shutdown of North Atlantic thermohaline
circulation or detachment of polar ice sheets. Science cannot,
even in principle, provide policy makers with any credible, consistent
targets upon which permit allocations, or other policy thresholds
can be based. We don't even really know what the actual consequences
of carbon stabilization at a given level would be for climate
behaviour.
During the summer, the Prime Minister announced
his intention to call a scientific conference to determine what
level of climate change would be "catastrophic". Yet
science cannot decide what counts as a catastrophe. What would
be the metric? Today a child dies every eight seconds from waterborne
disease. Every 15 seconds an African dies from Malaria. If these
do not represent already catastrophic levels of mortality among
the very kinds of populations that will be most vulnerable to
the impacts of climate change, it is hard to envisage what levels
would be required to provoke action. Similar points could be raised
about the current rate of loss of vulnerable species in marginal
ecosystems.
We also know that people in rich countries are
willing to live with very high levels of risk (such as earthquakes
in California and Japan or hurricanes in the USA), which by any
measure must be a much more immediate hazard than climate change
risk.
In the end, climate policy comes down to a question
of values—not science. The decision to proceed with effective
climate policies cannot wait for a dramatic precipitating event.
In fact, it's hard to visualize what such an event might be. But
without one it seems that public pressures on government and private
sector decision makers may not be sufficient to get them to take
and sustain necessary actions. We also know that the public is
more likely to be moved by disaster to support emergency relief
than it is to offer sustained support for development assistance.
Mobilizing public values rather than scientific consensus is the
key to successful climate action. These may be good reasons to
focus more attention than hitherto on adaptation policies that
are more directly linked in the public imagination to the consequences
of climate change than is the issue of emissions.
Presidency of the EU and G8 offers an important
opportunity to increase policy attention and resources focused
on proactive adaptation to climate impacts.
Until very recently the focus of international
negotiations about climate change focused overwhelmingly on emissions
mitigation and not very much on issues of climate change impacts
and adaptation. Indeed, for the better part of the decade leading
up to the turn of the last century, adaptation strategy was virtually
a taboo topic in climate policy discourse because of a widespread
belief that it would be viewed by many as a way to sidestep the
imperative to mitigate. Another reason why adaptation has gotten
off to a slower start in international negotiations is that it
is even harder to design a universal framework for adaptation
(let alone one where compliance is measurable and monitorable)
than it is for mitigation.
Adaptation measures avoid climate impacts by
changing human behaviours, such as land use, and by taking actions
to protect valued resources, communities, and landscapes. Adaptation
encompasses a wide range of options that can reduce vulnerability
of marginal human and natural populations to the consequences
of atmospheric disturbance. Many (although admittedly not all)
adaptation measures also offer increased resilience in the face
of climatic variability (such as droughts and storms), which makes
them potentially attractive policies even in the absence of long-term
secular changes in climate.
From the point of view of public policy implementation,
adaptation actually may have some advantages over policies directed
at mitigation. Adaptation may be more immediately relevant to
stakeholders than emissions mitigation as it directly addresses
people, objects, and landscapes that are known to them and valued
by them in their daily lives. Thus adaptation policies may provide
opportunities for a wide variety of people to become directly
engaged with the climate issue. Also, the basic regulatory and
legal concepts and frameworks already exist (eg, governance of
land use) and are broadly accepted; they just need to be adapted.
This is not to minimize the political challenge, but the point
is that you are not starting from scratch. This is in marked contrast
with the challenge of mobilizing public support and action to
cut emissions. Emissions are too abstract and too easily seen
as someone else's problem to be a good starting point from which
to mobilize support for climate policies. However, once people
have mobilized around concrete adaptation goals they may be more
likely to recognize the limits of adaptation and move to support
for more effective emissions reductions measures than seem plausible
at present.
Domestically, the UK Climate Impacts Programme
and various regional initiatives represent an important start
in this direction. Government support for these kinds of programmes
should be strengthened across all of the governments of the EU
and G8.
Another advantage of increasing the focus on
impacts and adaptation is that action on these issues does not
require any kind of global consensus. Indeed, as impacts and the
potential for adaptation vary widely on a regional basis, it seems
quite likely that that such an emphasis would favour regional
responses. There would almost certainly be many and varied opportunities
for the articulation of climate policies with other policies designed
to improve public health and protect populations from natural
disasters.
In summary, the UK presidency of the EU and
the G8 presents an important opportunity to open up much needed
avenues of climate policy that are presently under emphasized.
The current overwhelming focus on Kyoto offers only one potential
path and, at present, there is no viable alternative or fallback.
Even if the Kyoto route is followed to its conclusion, a significant
reversal of the last three decades of disinvestment in energy
R&D and a much increased focus on adaptation strategies will
be required. If Kyoto does not deliver the results desired of
it, investments in energy R&D and adaptation will be even
more critical.
PART II: SPECIFIC
PROBLEMS ASSOCIATED
WITH GLOBAL
EMISSIONS TRADING
To what extent does emissions trading offer the
best potential for achieving radical reductions in carbon dioxide
worldwide? Could other bespoke approaches offer better and more
targeted solutions?
It is often claimed that governments have successfully
applied emissions trading in combating acid rain, although even
these claims are sometimes disputed. However, basing the expectation
that there will be an efficient global market in greenhouse gas
emissions on, for example, experience of the US market in sulphur
emissions, may be problematic for several reasons.
First, all existing emissions trading has been
within nations where the state has been able to establish and
secure property rights.
But international law cannot compel countries
to remain within a treaty and (as indicated by the nuclear non-proliferation
regime) sanctions on defectors are generally not effective. As
presently constituted, international law is a poor mechanism for
allocating permits and controlling a permit market potentially
worth trillions of pounds. It is hard to envisage an effective
mechanism that would prevent countries from selling their emissions
shortfalls until their quotas are used up and then exiting the
agreement or forcing the renegotiation of allocations.
This problem is ameliorated where states are
closely bound by other constitutional or treaty arrangements,
such as the countries of the EU, where withdrawal from the trading
system might not be possible due to the wider net of obligations
and advantages of membership. At present, the only global candidate
for such a role would appear to be the World Trade Organization.
Despite the carrot of WTO membership that has been held out to
Russia if it should ratify the Kyoto Protocol, the world trade
body shows few signs of developing in this direction.
Second, emissions trading creates new property
rights of uncertain value.
The fact that property rights in a well-functioning
market are more valuable that the annual payments that those rights
generate creates huge obstacles to agreeing initial allocations
of emissions rights, as their eventual value is so difficult to
determine. This was the problem that held up progress on the UN
Convention on the Law of the Sea (UNCLOS) for many years, although
seabed-mining rights for manganese nodules had only a hypothetical
future value. This creates significant headaches for the international
allocation of emissions permits, the value of which are essentially
unknown, but potentially very high. Emissions levels for the most
important greenhouse gases are inherently unpredictable.
Third, in the past, national governments establishing
trading programmes for environmental management have had to buy
off the opposition of affected parties claiming established rights
that would be violated unless they are grandfathered in.
For example, the US government had to make substantial
allowances for the existing sulphur emissions of electric power
companies in its programme designed to reduce acid rain. Indeed,
it was only able to allocate permits at all because of its ability
to threaten more costly forms of regulation if the industry did
not accept the system—an option unavailable at the international
level. In New Zealand, the system of tradable fishing quotas ("TACs")
was only possible because of the substantial grandfathering of
established interests within the fishing industry. This may be
a necessary concession to set up a programme, indeed substantial
new chlorofluorocarbon production capacity in the former Soviet
Union was grandfathered under the original terms of the Montreal
Protocol.
In constructing an international climate regime,
the emissions baselines established for certain countries (notably
Russia and the Ukraine) under the Framework Convention on Climate
Change were set at levels that they were unlikely to reach, even
under optimistic economic scenarios. The result is a potential
for sales of "hot air" (allowances that do not actually
represent emissions reductions) to the West in excess of £100
billion. Any serious attempt to develop the Kyoto global trading
framework will require that the baselines for Russia and Ukraine
be revisited. However, this would drastically reduce the incentive
for these countries to participate.
The problem is exacerbated in any international
context where new entrants, ie, developing countries, will demand
allocations that will upset the historically established expectations
of the industrialized world. This is an especially visible issue
with respect to the prospects of achieving any sort of US participation
in an effective climate policy and was a factor in the Senate's
unopposed resolution not to support any US emissions reduction
commitment that was not accompanied by comparable commitments
from developing countries.
Fourth, monitoring compliance may be more problematic
than is commonly recognized.
Monitoring carbon dioxide from fossil fuels
is simple in principle, although it must be done indirectly by
calculating the emissions implied by combustion of fuels under
certain assumptions of thermodynamic efficiency. However, even
approximately accurate calculation of emissions from coal, oil,
or gas depends on access to reliable figures for consumption,
which only takes account of official production and trading. Although
these are generally considered to be tolerably well measured,
there is room for scepticism about the official fossil fuel production
figures of many countries that have access to large, but poorly
monitored resources.
The issues of monitoring and enforcement are
exacerbated still further by the inclusion of multiple gases and
all sources and sinks in the global programme envisioned under
the Kyoto protocol. Biomass burning, tree planting, and carbon
released from and sequestered in soils are examples of carbon
fluxes that are much harder to measure (or, more accurately, estimate)
than fossil fuel emissions. Once you include sequestration in
carbon accounting, the uncertainties and complexities increase
with the inevitable result that countries will try and game the
system to maximize their claims to be removing carbon dioxide
from the atmosphere. This can produce some paradoxical results.
For example, at least one study published in Science has
suggested that the annual emissions of the USA may be carbon neutral
due to the rate of reforestation, especially in the Northeast.
Furthermore, the Kyoto Protocol created a basket
of six greenhouse gases, each of which has different atmospheric
warming characteristics. The accounting device of "global
warming potentials" or "CO2 equivalency" is designed
to eliminate this variation; however periodic scientific reassessments
of these values and the issue of the dramatically different residence
times that the gases will persist in the atmosphere have the potential
to destabilize the greenhouse gas accounting system upon which
trading will have to be based.
Fifth, even at a national level, emissions trading
has only been implemented for stationary sources, such as electric
power plants.
A significant proportion of greenhouse gas emissions
are from mobile sources and a significant proportion of these
are engaged in international travel involving "bunker fuels"
which are exempted from domestic taxation. The Royal Commission
on Environmental Pollution and the Environmental Audit Committee
have repeatedly highlighted this problem.
Sixth, the issuance of permits may have implications
for the distribution of liabilities.
The allocation of potential civil liabilities
for damages caused by permitted greenhouse gas emissions is an
issue has received little attention. Does issuance of emissions
permits imply the assumption of liability? In other words, will
governments be held liable in law for damages caused by greenhouse
gases emitted by permit holders? The recent initiation of civil
suits against US electric utilities for the costs of rectifying
climate impacts from their emissions suggests that climate liabilities
may become an issue intertwined with the creation of a system
of formally recognized emissions rights.
Finally, any international system of carbon
trading is likely to be only as good as the national systems that
compose it. The UK's experience is not encouraging.
It seems likely that any such scheme will permit
national governments to trade internationally while firms trade
within national boundaries. In the case of the EU, the member
states propose to establish a European bubble that would allow
the EU essentially to function as a single nation for international
carbon accounting purposes.
The UK has conducted the world's first experiment
in national carbon trading. Defra claims that "31 organisations
("direct participants" in the scheme) have voluntarily
taken on emission reduction targets to reduce their emissions
against 1998-2000 levels, delivering 11.88 million tonnes of additional
carbon dioxide equivalent emission reductions over the life of
the scheme (2002-06). . .In the first year, the Direct Participants
achieved emission reductions of 4.64 million tonnes CO2e (carbon
dioxide equivalent) against their baselines and in the second
year they have achieved emission reductions of nearly 5.2 million
tonnes CO2e against their baselines." (http://www.defra.gov.uk/environment/climatechange/trading/uk/index.htm).
However a careful reading of the UK NAO report
on the scheme suggests that it was something less than a resounding
success. It actually:
— had considerable difficulty in getting
going;
— established very undemanding baselines;
— significantly overpriced the value
of reductions purchased (nearly £18 per tonne as against
a current market price of £2.50 per tonne);
— only delivered 4 Direct Participants
with significant surpluses to trade; and
— only generated trade at 10% of the
tradable surplus savings achieved (most of the savings being banked
against future emissions).
The government spent £215 million to purchase
emissions reductions under the scheme, which does not include
the cost of establishing and running it. A well-designed simulation
could almost certainly have generated any conceivable social-learning
benefits obtained from the scheme at a small fraction of these
costs. In short, the very limited domestic experience with greenhouse
gas emissions trading is not as encouraging as its designers might
have hoped.
Overall, the international prospects for emissions
trading seem to depend on the initial target reductions not being
sufficiently painful to discourage participation. Even at this
level there is likely to be much international wrangling over
the fairness of the allocation of permits and commitments. However,
undemanding baselines and initial targets will require severe
(ie, expensive) corrections in later phases of both domestic and
international trading systems. This is the particular form that
the "ramping up" of Kyoto targets in future commitment
periods would take under a trading scenario. The acceptability
of such corrections to domestic trading systems will vary tremendously
from country to country. Policymakers depending on international
trading to deliver a solution that is both environmentally effective
and economically efficient are betting that the system will be
resilient to both cheating and withdrawal by the time those corrections
are required.
Overall, the inherent problems suggest that
it is unlikely that the Kyoto cap-and-trade scheme will result
in an economically efficient global market that achieves environmentally
effective greenhouse gas emissions reductions.
However, this does not mean that trading is
entirely useless. It seems that trading may well be a useful policy
tool in at least two respects.
First, where countries are closely bound together
by other constitutional or treaty arrangements, such as within
the EU, so that the incentives for defection are drastically reduced,
trading may well be a mechanism for drawing attention to climate
goals as well as contributing to their fulfilment within such
regional groupings.
Second, any strategy to stabilize greenhouse
gas concentrations will require considerable transfers of technology
to allow developing countries to leapfrog the carbon intensive
development phase experienced by the industrialized (and now post-industrialized)
world. Trading with developing countries may well be a necessary
vehicle to convince the domestic populations of the transferring
nations that they are getting something in exchange and to discourage
a dependency culture among the recipients of such transfers.
What are the alternatives to a global cap-and-trade
regime?
At least three alternative architectures to
Kyoto have been described by observers who are critical of the
cap-and-trade approach. These are:
— the "hybrid approach" of
tax-and-trade; and
— the "clumsy regime" approach,
also described as the "policies-and-measures" approach.
A coordinated system of carbon taxation, in
contrast to emissions trading, sets prices rather than quantities
for greenhouse gas emissions. This is likely to be more economically
efficient than a cap-and-trade regime because of the long atmospheric
lifetime of carbon dioxide, which requires an inexorable, but
non-volatile price signal to bring about the required changes
in infrastructure investments. It could ameliorate the political
difficulties of allocating emissions reduction commitments among
countries, because governments would have some discretion to adjust
the level of taxation to suit their economies, and it would avoid
creating the potentially huge financial flows that would result
from the creation of new property rights under a trading regime.
However, taxation also has its drawbacks. It
is likely to be regressive. It would make the costs of climate
policy more transparent and therefore it would be an easier target
for political opposition. There would inevitably be divisive disagreements
about the ways in which the tax revenues were returned to the
economy. Like any "sin" tax, carbon taxation could potentially
create a moral hazard for governments seeking to offset its distorting
effects on the economy by lightening other forms of taxation.
And, unless it were set at an internationally uniform level (thus
eliminating the advantage of government discretion) it would also
have implications for international competitiveness.
The "hybrid approach" proposed by
David Victor, combines emissions trading and carbon taxation.
This mechanism would allow governments to set targets for both
emissions quantities and prices by establishing a trading system
with price ceilings on permits. Some of the Kyoto complications
would be eliminated by confining the system only to carbon dioxide.
But there would be no absolute limit on the number of permits,
so that if the trading price exceeds the target price, firms would
be able to purchase new permits from governments at the lower
issue price. Whenever the trading price dropped below the issue
price, firms would purchase them at lower cost on the open market.
Victor argues that this would make it easier for governments to
allocate commitments and permits, reduce firms' uncertainty about
the costs of compliance, and enable compliance to be enforced
by making the buyer liable for the seller's compliance as a way
of discouraging "hot air" trading.
Of course, the hybrid approach is not without
its downsides. While it would encourage emissions reductions,
it would be less restrictive than the Kyoto trading system because
the number of permits would be less rigidly restricted. Individual
governments may be tempted by the prospect of extra revenue to
sell permits below the agreed price. It would still require a
fairly intrusive system for monitoring compliance, especially
to reveal differences in nominal and effective tax rates if governments
opt to implement their obligations under the system solely by
levying the emissions taxes and forgoing trading.
The "clumsy approach" is much less
dependent on coordinated international action and focuses on social
learning. Countries would pick and choose their policy measures
that suit their particular circumstances. Such measures could
range from informational instruments, such as labelling, through
market instruments, such as emissions trading, to command and
control mechanisms, such as technology standards. The benefit
of this approach is that it focuses on what governments, firms,
and households actually do to reduce their emissions, in marked
contrast to the target setting that has characterized international
policy making since the Toronto Conference of 1988. Since the
exact consequences of any particular package of policy measures
would be explicitly uncertain, governments would focus less on
compliance with precise targets and more on a rough allocation
of effort and the direction and pace of progress. The flexibility
of this approach would allow early mitigation efforts to serve
as a series of policy experiments from which lessons could be
drawn about what works when and where. Cooperation, competition,
and control could all be brought to bear on the problem as appropriate.
A particular advantage of this approach is that it allows for
"strategy switching". Policy actors (not just governments)
would have the ability to abandon courses of action that are not
working and transfer their efforts to those that do, without the
necessity of renegotiating an entire international regime.
The problem with this approach is that its downsides
mostly accrue to governments and the sense of loss of control
could be problematic. Monitoring and verifying the actions of
other nations would be a considerable challenge, but part of the
benefit for this approach is that it places less emphasis on the
nation state and encourages transnational collaborations among
firms, trade associations, local governments, nongovernmental
organizations, scientific and technical organizations, and so
forth. Governments could negotiate performance benchmarks analogous
to the OECD's Environmental Performance Reviews, which assess
countries' environmental performance in relation to the goals
that they have set for themselves. An approach of learning-by-doing
may not be an elegant one, but it does have the advantage that
it does not provide incentives for firms or countries to hold
back from emissions reductions in the expectation that such reductions
will have a future value that would be lost by action today.
This brief review of some alternative approaches
to the Kyoto system of cap-and-trade is necessarily incomplete.
At best it is only suggestive, but at least it does suggest that
Kyoto need not be "the only game in town". To put all
of our eggs into the Kyoto basket seems to be a somewhat brittle
strategy. The present imperative must be to open up new avenues
for climate policy. The UK presidency of the EU and G8 represents
an historic opportunity to do so.
19 November 2004
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