More "Hot Air"
Climate change, carbon permits, and international politics
By Ujjayant Chakravorty, Associate Professor of Economics

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Academic Exchange April/May 2000 Contents Page

In 1997, delegates from all over the world gathered in Kyoto, Japan, for a conference on global warming. As we face another summer of smog here in Atlanta, the Academic Exchange invited Chakravorty, who specializes in international environmental issues and served as a delegate to the Kyoto Negotiations, to reflect on the status of attempts to decrease carbon emissions.

There is overwhelming consensus among scientists that carbon emissions from the burning of fossil fuels are heating up the earth with potentially serious consequences--sea level rise, frequent and massive flooding, melting of polar ice caps. In December 1997, the Kyoto protocol asked for a drastic cut in carbon emissions, mainly from the advanced economies of the West and the European Union. The protocol does not impose any cuts on emissions from developing countries such as China, India, and Brazil, whose domestic economies (and therefore fossil fuel consumption) are expected to grow at relatively faster rates in the coming years. The protocol will not be operational until it is ratified by a majority of the countries emitting carbon, and the way things are going, that is not likely to happen soon.

Though negotiations continue among representatives from all the countries, politics over carbon permits--a system of chits designed to limit the amount of carbon a country may release--has blocked any real progress on this issue vital to the future of the global environment. Simply put, the United States is expected to be 30 percent over the limits set in Kyoto for carbon emission by the end of this decade. The U.S. plans to address this problem by buying carbon permits from poorer countries that use less carbon. Russia and the Ukraine alone may have as much as 600 million tons' worth of permits to sell due to their stagnant economies and declining energy use. Even in a conservative estimate, these two countries could earn up to 20 billion dollars a year, while the global environment benefits not at all.

Environmental watchdogs dub such traded permits "hot air," since they do not result in any meaningful domestic reductions in energy consumption. The White House projects that the U.S. could meet 85 percent of its carbon reduction target through the purchase of permits, with marginal impacts on the booming national economy.

Powerful forces, however, block the creation of an international market for carbon. By all accounts, Europe will enjoy a carbon permit surplus by 2010, and thus have no incentive to seriously reduce energy use. In fact, the major industrial countries of the E.U.--France, Germany, and the U.K.--are already in surplus. And France is considering selling its nuclear technology to developing countries once they enroll under the Kyoto umbrella. The E.U. is thus a fierce opponent of carbon permit trading and has recently put out proposals that would reduce the quantity of carbon permits bought and sold in the world market by about 70 percent. Are such actions motivated by visions of a greener future for all or a desire to gain a competitive edge over the U.S.?

A smaller carbon market would force the U.S. and Japan to make drastic cuts in energy use at home and raise permit prices. While estimates vary, experts agree the effect on U.S. industry would be severe. In a recent conference, a representative of the coal-fired electric utilities in North America claimed that most of their members would go out of business at carbon permit prices in excess of twelve dollars per ton. These numbers, however, could be exaggerated. Even if an international market in carbon is not feasible politically, a domestic market could be developed. The U.S. has already experimented with a very successful, albeit smaller, market in sulfur emissions under the Clean Air Act, which led coal-fired utilities to reduce sharply sulfur emissions through an elaborate trading and auctions mechanism.

Another critical element in the negotiations is the participation of developing countries. Environmen-tal activists argue that developing countries should never sign the protocol because carbon limits are a form of "enviro-colonialism"--a calculated move to keep developing countries in perpetual poverty. It may be more profitable, however, for a country like India or China to sign the Protocol and be able to sell their carbon permits now and benefit from the high prices, instead of holding out for some future date.

Presidential politics also threaten this process. Vice President Al Gore gave the Kyoto negotiations a crucial push. If he lands in the White House next year, the chances of ratification will increase significantly.

A Republican presidency will likely delay the process. Even if the protocol is ratified, key details remain unresolved: Who will verify international carbon reductions, screen spurious "hot air" projects, undertake baseline measurements, and keep global carbon accounts?