After Kyoto: A Global Scramble for Advantage.

• Author: YANDLE, BRUCE

The 1997 Kyoto Protocol is generally viewed as having set carbon emission reduction goals for the developed world for the purpose of avoiding global warming, a tragedy of the commons.(1) But instead of avoiding the plaguing free-rider problem that works in favor of tragedy, the protocol allows uncontrolled growth in carbon emissions from the developing world, which will more than offset reductions elsewhere. Strictly speaking, the Kyoto Protocol is not about avoiding a tragedy of the commons. It involves much more than that.

Apart from expectations that meeting the terms of the protocol will not reduce future emissions, the scientific basis for Kyoto's massive and costly undertaking is far from settled (Singer 1999). Competing models that seek to link human behavior to climate change yield mixed results, which is to say that temperature changes may be caused by solar activity, clouds, or ocean temperature changes. There is also contradictory evidence on temperature change itself. It is not a foregone conclusion that temperatures, though increasing in the last few years, are rising systematically. Nor is it clear that human activity contributes to the current temperature increases.

Putting the scientific questions to one side and viewing the protocol on its own terms, there is serious question whether it is primarily about carbon emission reductions and global warming or about something else. An analysis of the agreement and of the post-Kyoto strategizing suggests that control of global warming is largely symbolic, which does not gainsay its vital importance to environmental groups. The real effects of the protocol relate to cartelization and efforts by interest groups and countries to gain competitive advantage in a globally competitive world. Global warming may be just the right wrapping for a major rent-seeking package (Yandle 1998).

To support this assertion, or to refute the null hypothesis, it is necessary to (1) provide evidence from the agreement itself that cartelization is a real possibility and that differential effects across countries, industries, and firms offer significant incentives for political agents to raise rivals' costs; (2) show that the resource costs of meeting the terms of the protocol are large enough and the opportunities for gaining markets or protecting existing ones fruitful enough to justify the cost of cartelization; and (3) provide clear evidence that countries, firms, and industries are indeed behaving strategically in efforts to use Kyoto as a rent-seeking endeavor. To accomplish these three tasks, I first discuss the global commons problem and provide background information on the Kyoto agreement that shows differential effects across countries. I then survey research on the costs of Kyoto, showing that the resource costs and transfers involved are massive and identifying potential winners and losers in particular product and geographic markets. I provide anecdotal and statistical evidence regarding the behavior of energy firms, trade associations, and countries to demonstrate the crucial importance of Kyoto's environmental symbolism in achieving cartelization goals. Finally, I offer some thoughts on Kyoto and alternate policies.

The Global Commons and the Kyoto "Solution"

The Commons Problem

Most environmental problems begin with a commons, an unrationed resource that tends to be overexploited. Steps taken to ration activity on the commons are justified as being necessary to avoid the tragedy of the commons (Hardin 1968; Anderson and Leal 1991). Garrett Hardin and others remind us that property rights and other rationing institutions can emerge, converting a tragedy to triumph. But the Buchanan-Tullock analysis of political instruments chosen for accomplishing this feat warns us that rent-seeking actions taken to define regulatory strategies can earn a high private return (Buchanan and Tullock 1975). In their story, special interest groups and the politicians who "solve" the commons problem can share monopoly rents if the appropriate regulatory remedy is applied.

Appealing to the commons problem when considering global warming is both logical and politically useful. Although its scarcity is still not well established, the upper atmosphere is clearly an unrationed resource. Any steps taken to alter this nonproperty arrangement will require global political action. Yet the commons imperative is by its nature a centralizing force at any level of human activity. Decentralized spheres of private action and exclusive private rights--what might be termed individual or local sovereignty--are reduced as collective action expands. In addition, as the scope of action expands, special-interest groups seek to have wealth redistributed in favorable ways. Of course, successful steps taken to avoid real tragedies can generate social gains by precluding the destruction of valuable assets. But as institutions form, there are trade-offs to consider. Rent-seeking costs may be larger or smaller than the gains from avoiding a tragedy of the commons.

As the dimensions of the commons to be managed expand beyond the community to include the state, then the region, the nation, and finally the world, the diverse rules that govern heterogeneous communities give way to ever more homogeneous regulations that can restrict competition in the name of environmental protection. Customs, traditions, and institutions such as the common law tend to be pushed to one side as statutes and treaties form a more extensive social order. Local sovereignty is compromised as collective decision-making is delegated to state, national, and then international bodies. And the potential rents to be earned by competing countries, far-flung global firms, and accommodating politicians achieve significant value, but not without cost.

Another trade-off accompanies the transfer of sovereignty from smaller to larger communities (Yandle 1997, 29-30; Ostrom and Schlager 1996, 46). When remotely determined homogeneous rules are imposed on diverse communities, some efficiencies in resource use, where more readily measured costs are weighed against locally perceived benefits, are exchanged for the avoidance of more remote costs, not easily observed at local levels. As control becomes more remotely determined, the efficiency losses tend to increase. It is obviously important that the marginal benefits from avoiding global costs exceed the ever-increasing marginal costs of such local efficiency losses.

The Kyoto Protocol is a case in point. The December 1997 agreement to reduce greenhouse gases, endorsed by representatives from 174 nations, joins an estimated 180 other environmental treaties on deposit with the UN Secretary General (Committee to Preserve American Security and Sovereignty 1998). Kyoto and the other treaties differ fundamentally from national decisions to legislate in the interest of cleaner air or water. First, the protocol establishes a relatively homogeneous rule--greenhouse gas reductions based on 1990 emissions--for scores of heterogeneous communities. Next, constitutional constraints and domestic rules of law that normally protect property rights and sharpen the spur of competitive behavior in domestic economies can be relaxed in the name of avoiding global warming. Coordinated output restrictions, ostensibly for environmental protection, are viewed benevolently.

How the Protocol Evolved

The Kyoto Protocol is an evolved agreement rooted in the notion that developed countries, which are necessarily large energy users and greenhouse gas producers, should bear the brunt of reducing emissions in the name of avoiding costly climatic changes. This idea, discussed formally at Toronto in June 1988 and considered by the U.S. Congress in 1989 in a proposed bill, the Global Warming Prevention Act, was fundamental to commitments reached in 1992, when representatives of 160 nations attended the Rio de Janeiro Conference on Environment and Development (Manne and Richels 1991, 88).

Efforts to contain greenhouse emissions were strengthened at the 1995 Conference of Parties to the Rio de Janeiro Agreement, yielding the Berlin mandate, which stressed the importance of gaining national commitments to greenhouse gas reductions. Then, an ad hoc group that met in Geneva in 1995 and again in 1996 called for binding mandates for thirty-eight developed countries known as Annex I, including primarily the members of the Organization for Economic Cooperation and Development (OECD) and eastern European states. Cooperation and emission reporting were expected of developing countries, and a stronger commitment was expected from eastern European states in transition, but no quantifiable emission reduction commitments were called for. A follow-up meeting for resolving issues left on the Kyoto table took place in Buenos Aires in November 1998.

The Kyoto Protocol, endorsed in Kyoto on December 11, 1997, now awaits ratification by the U.S. Senate, which has indicated that it will not ratify the treaty until the developing world makes reduction commitments.(2) The protocol sets 1990-based emission reductions for greenhouse gases (primarily carbon dioxide) for the Annex I countries, to be achieved by the "commitment period," 2008-2012. At that time, emissions will be averaged across the designated years to determine compliance.

For the protocol to become binding, fifty-five countries must ratify it--which implies that seventeen non-Annex I countries must give their approval--and these ratifying countries must account for at least 55 percent of the desired emission reductions. In April 1998 the European Union members officially ratified and signed the Kyoto treaty, accepting an 8 percent reduction of carbon emissions over the next thirteen years (Leopold 1998). The United States, which had accepted a 7 percent reduction, still had not ratified the agreement, and the likelihood of its doing so was slight. In April, Japan, Australia, Brazil...