January 2002 | News of the Earth
Marrakesh, the Kyoto Protocol, and CCE
by Dave Aftandilian
In mid-November of last year, the world finally got some good news on global warming: the representatives of more than 160 nations meeting in Marrakesh, Morocco, reached an agreement on nearly all the fine print for the implementation of the Kyoto protocol. If all goes well — specifically, if at least fifty-five industrialized nations that emit at least fifty-five percent of the world’s greenhouse gases (such as carbon dioxide) approve the final treaty — the protocol will be officially ratified later this year at the U.N.’s World Summit on Sustainable Development in Johannesburg, South Africa.
Although Paula J. Dobriansky, the undersecretary of state for global affairs and our chief negotiator at the Marrakesh talks, admitted that "climate change is a serious issue that requires real action," the U.S. delegation effectively sat out the talks. There are no indications that the Bush administration will change its policy and ratify the protocol. Thankfully, the governments of most nations around the world, and many business leaders within the United States, do not share the Bush administration’s shortsightedness.
In fact, the needed improvements in energy efficiency, development of renewable energy and related environmental technologies, and other changes that would be necessary to comply with the Kyoto protocol provide us with a golden opportunity to develop these clean technologies and export them to the entire world, making a tidy sum and doing our part to protect the world’s climate at the same time. As Michael Zammit-Cutajar, a U.N. official interviewed by the New York Times put it, "The Marrakesh results send a clear signal to business, local governments and the general public that climate-friendly products, services, and activities will be rewarded." Too bad the Bush administration hasn’t received that signal yet.
To build enough of a coalition to ratify the Kyoto protocol without U.S. participation, the negotiators at Marrakesh had to make a number of concessions that will render the final treaty less effective than it might have been. In general, the Marrakesh rules still require most industrialized nations to reduce their emissions of the greenhouse gases, such as carbon dioxide, that cause global warming; on paper, countries in the West will have to reduce their emissions by an average of about 5.2 percent below their 1990 levels by 2012. There will also be significant penalties for noncompliance; countries that do not meet their emission-reduction requirements on time will have their target reductions raised by 1.3 percent.
But, in a major concession to Russia, Japan, Australia, and Canada, so-called carbon sinks will be allowed to count toward these reductions. Russia, for instance, demanded (and received) double the emission reduction credits it would originally have received for its carbon-absorbing forests and agricultural land. While forests and agricultural crops do indeed use up carbon after they are first planted, recent research indicates that previous estimates of the long-term carbon-storing capabilities of trees and soil may have been "unduly optimistic," as one study in Nature magazine puts it.
Other "flexible mechanisms" for industrialized nations to meet their carbon emission targets under the Marrakesh rules include providing green technology to and protecting forests in developing nations (thereby helping them reduce their greenhouse gas emissions), as well as increasing the use of no-till agriculture and other techniques that reduce the loss of carbon from soils. Because these mechanisms do not actually result in emission reductions in the same way that increasing energy efficiency or switching to renewable energy sources would, they will reduce the Kyoto protocol’s effectiveness at combating global warming. The World Wildlife Fund (WWF) and others have estimated that concessions on flexible mechanisms like these together with the nonparticipation of the United States will reduce the effectiveness of the treaty by at least half.
However, a weaker treaty to address global warming is much better than no treaty at all. As Richard L. Schmalensee, dean of the Sloan School of Management at MIT, puts it, the main benefit of the Kyoto protocol will not be the modest emissions reductions it will produce, but the international mechanisms and institutions to cope with global warming that it will create. "It’ll build some engagement and the habit of compliance," he claims. "This is a first step."
The Business of Global Warming
Almost every day there is more evidence that suggests not only that global warming is happening, but also that human-made greenhouse gases are responsible for it. Last June, for instance, the National Academy of Sciences — the United States’ most prestigious scientific body — wrote in a study requested by the Bush administration that "greenhouse gases are accumulating in earth’s atmosphere as a result of human activities, causing surface air temperatures and subsurface ocean temperatures to rise. Temperatures are, in fact, rising." According to the report, the increasing temperatures "will be accompanied by rising sea levels, more intense precipitation events in some countries and increased risk of drought in others and adverse effects on agriculture, health, and water balance. We urge everyone — individuals, businesses, and governments — to take prompt action to reduce emissions of greenhouse gases." The strong tone of the report is all the more remarkable because the panel that produced it included several climate scientists who had previously been skeptical of the reality and severity of global warming, including prominent MIT scientist Richard S. Lindzen.
While the Bush administration has effectively ignored this report, as well as the recent state-of-the-art considerations of the science and potential impacts of global warming from the Intergovernmental Panel on Climate Change, business leaders in America and around the world have been taking the initiative to act to address global warming even before international and national policies require them to. Some companies, such as those in the insurance industry, are acting because global warming will directly affect their businesses — to the tune of billions of dollars worth of flood insurance claims in the case of the insurance industry. Some companies with an international profile are acting because their customers (and employees) in Europe and Japan are demanding that they do so. Others figure that increasing the efficiency of how they use energy simply makes good business sense, given the rising energy costs we’ve seen in recent years. And still others see acting proactively on global warming as good public relations, as well as a chance to get a leg up on competitors who wait until the last minute to act. As Peter J. Pestillo, chairman and CEO of the auto-parts manufacturer Visteon Corporation (and former top executive at Ford Motor Company in the 1990s), puts it, "People aren’t debating global warming any more. It is more to take a high ground where you will be one day, rather than be driven to it."
An excellent article in the New York Times last May listed some of the steps a wide variety of businesses have been taking to reduce their greenhouse gas emissions. All the large automakers are investing in new engine technologies to improve fuel economy. Oil companies such as Shell and BP are stopping the burning off of natural gas at their oil wells, and are instead trying to find ways to capture and market that gas. By last year, DuPont had reduced greenhouse gas emissions from its factories worldwide by 50 percent below 1990 levels, in part by changing the way it manufactures nylon, a process that used to release huge amount of nitrous oxide (which is a much more powerful greenhouse gas than carbon dioxide, about three hundred times more effective at trapping heat). Alcoa and others in the aluminum industry have been testing new smelting methods that could reduce emissions of both carbon dioxide and perfluorocarbons (another greenhouse gas), which could allow Alcoa to reduce its greenhouse gas emissions by as much as 50 percent below 1990 levels by 2010.
Another way that companies will be able to receive credit for reducing their greenhouse gas emissions under the Marrakesh rules for the Kyoto protocol will be through international carbon emissions trading. (Although the protocol only applies to sovereign nations, not corporations, countries will likely apply similar rules to businesses that operate within their borders.) The basic idea is similar to that of the sulfur dioxide emissions trading program that the U.S. Environmental Protection Agency (EPA) adopted to help reduce acid rain within the United States. Once a target emission level is decided, permits to emit a certain number of tons of carbon dioxide would be allocated among the relevant industries based on their emissions levels at a given point in time. Companies that reduce their emissions below the required levels may sell their permits to companies who need to emit more carbon dioxide than allowed. Unlike the sulfur dioxide trading system, the carbon dioxide emissions trading will likely take place at the international level.
The main benefit of a system like this is that it lets businesses do what they do best — find the least-cost way to meet a desired goal. Government still plays a part, in determining what the overall emissions level should be, verifying actual emissions, punishing violators, and so on. But emissions trading gives businesses both flexibility and a clear financial incentive for reducing their emissions.
The Chicago Climate Exchange
One of the most exciting developments along these lines is taking place right here in Chicago with the Chicago Climate Exchange, which according to its Web site is the first U.S. voluntary pilot program for trading greenhouse gas emissions. Funded through the Chicago-based Joyce Foundation, the Chicago Climate Exchange debuted last year, and hopes to begin real trading of emissions by next year. The exchange is headed by Richard L. Sandor, former vice-president and chief economist of the Chicago Board of Trade and one of the key architects of the EPA’s sulfur dioxide trading system. The project’s goal is to design and implement a voluntary private pilot market first based in seven midwestern states (Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, and Wisconsin) and later expanded to include national and international participants. The exchange will trade all greenhouse gases, not just carbon dioxide. Participants must agree to reduce their greenhouse gas emissions to 2 percent below 1999 levels in 2002, and by 1 percent per year after that up to a 5 percent reduction in 2005. (The year 1999 was chosen as the baseline date instead of 1990, as in the Kyoto protocol, because the data from 1999 are more easily obtained, verified, and monitored, according to Sandor.)
The exchange will monitor, verify, track, and report the required emissions reductions. Participants can either directly reduce their emissions, buy allowances from other companies that have cut their emissions more than required, or receive credit for certain mitigation and offset projects in the United States and overseas. Such projects might include the use of renewable energy instead of fossil fuels, making manufacturing and other processes more energy efficient, carbon sequestration in "sinks" through no-till farming and tree and grass plantings, recovery and use of agricultural and landfill methane, and vehicle fleet efficiency improvements.
So far more than thirty groups have signed on to participate in the Chicago Climate Exchange, from utilities to manufacturers to agricultural co-ops. The first municipality joined this past November, when Mayor Richard Daley announced that the city of Chicago would participate as part of its thirteen-point energy plan. Named its honorary chairman, Mayor Daley cited the exchange as "a good example of the kind of innovation that will help us solve our energy and environmental problems." Mexico City joined at the same time. Other members of the exchange include Agriliance, BP, DuPont, Exelon Corporation (parent company of ComEd), Ford Motor Company, GROWMARK, International Paper, Midwest Generation (owner of several Illinois power plants), The Nature Conservancy, and Waste Management.
Why have so many companies signed up for the exchange? The answer is simple. "Those of us that can see it will be necessary in the future to reduce CO2 want to be involved in creating the mechanism that will do that," in the words of Kristine Krause, a vice-president of Milwaukee-based Wisconsin Energy Corporation. Companies that help design the first large-scale greenhouse gas emissions trading system in the United States will obviously have a competitive advantage over other companies when an emissions trading system for greenhouse gases becomes mandatory. Not to mention that many of the energy efficiency and other measures companies will have to take to reduce their emissions under the exchange make sense from a business point of view anyway because they reduce energy costs and raise productivity. As Sandor has said, "these companies really believe that a proactive approach to climate change advances everyone’s long-term interests. It’s simply good business."
The Chicago Climate Exchange isn’t the only act in town, though. Globally, about fifty-five million tons of greenhouse gases have already been traded since 1996, according to the global energy broker Natsource. Denmark has established the first national trading scheme, focusing on the utilities industry. And the Cantor Fitzgerald Group and Pricewaterhouse Coopers, two global financial services firms, have joined together to create CO2e.com, "the pre-eminent resource to understand, mitigate, and manage the transition and impact of a greenhouse gas-constrained future on corporations globally," according to its Web site. CO2e.com allows carbon trading online twenty-four hours a day by members (membership is free), and has a number of step-by-step tips for businesses on creating a carbon management strategy, including comparative information on advisors and service providers on climate change and related issues.
Regardless of whether the Bush administration wakes up and smells the greenhouse gas emissions in time to sign onto the Kyoto protocol, "multinationals know they’ll eventually have to deal with emissions caps in at least some of their territories," according to Sandor. The Chicago Climate Exchange, CO2e.com, and other groups like them will give proactive companies a chance to get in on the ground floor and help design the greenhouse gas emissions trading mechanisms that the Kyoto protocol will soon institute officially around the world.
Resources
Intergovernmental Panel on Climate Change
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