Repudiation and regret: is the United States sitting out the Kyoto Protocol to its economic detriment?

• Author: Shaffner, Eric

1. INTRODUCTION II. THE KYOTO PROTOCOL: BACKGROUND AND THE U.S. RESPONSE III. RENEWABLE ENERGY TECHNOLOGIES AND ENERGY EFFICIENCY IV. EMISSIONS TRADING V. THE CLEAN DEVELOPMENT MECHANISM VI. CONCLUSION I. INTRODUCTION

   In early 2001, the Bush Administration withdrew from the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) (1) by removing the United States' signature from the agreement. (2) The government's stated rationale was that the global warming treaty would hamstring the American economy by causing an unacceptable loss of jobs and money. (3) While that rationale has been challenged, (4) with the protocol's entry into force in 2005 another possibility is becoming increasingly salient: The United States may actually end up suffering economically and otherwise by having rejected the treaty.

   First, the U.S. government's position on the issue of climate change has translated into a lack of incentives for businesses and state and local governments to invest in technologies that improve efficiency and reduce emissions, both for domestic use and export. Second, only Kyoto Protocol Parties may use the new carbon trading markets to offset their emissions of greenhouse gases (GHGs). Consequently, American companies have less incentive than firms in states that have ratified the Kyoto Protocol to engage in what is shaping up to be a potentially profitable system that also encourages efficiency, innovation, and competitiveness. Finally, only entities from Parties to the Kyoto Protocol may fully participate in the Clean Development Mechanism (CDM), under which the carbon emissions of entities in developed countries may be offset by investments in emission abatement projects in developing countries. U.S. companies may participate, but they may not use the resulting emissions credits to their gain under the Protocol. The CDM may thus give foreign companies the upper hand in seeking contracts for CDM projects in developing countries.

   In September 2004, the largest solar power plant in the world opened in Germany. (5) Built using technology from Shell Solar, a Dutch company, and Siemens, a German firm, the plant can provide electricity for approximately 1,800 European homes. (6) In addition, the facility will reduce global annual carbon dioxide emissions by about 3,700 tons. (7) Two months earlier in China, German Foreign Minister Joschka Fischer inaugurated what is ostensibly the largest solar collector manufacturing facility in the world. (8) For Fischer, the Sino-German joint venture was proof of the business opportunities available to those with expertise and a willingness to participate in the renewable energy sector. (9) Meanwhile, 7,000 miles away, AstroPower, the second largest solar cell manufacturer in the United States, closed its doors for the last time, driven into bankruptcy by poor sales and crushing debt. (10) "It's almost embarrassing," said renewable energy consultant Christopher Reed, discussing the situation in the American solar industry. (11) "The photovoltaic technology came out of Bell Labs in the U.S. We should be the world leaders." (12)

   The successes of the German solar industry are directly related to government policies favoring technologies that enable the country to work towards meeting its Kyoto obligations. (13) Similarly, early (and gradually tapering) government subsidies led to the installation of 144,000 residential photovoltaic systems in Japan by 2002. (14) But in the United States, production of solar cells dropped fourteen percent in 2003 alone (in part due to the bankruptcy of AstroPower). (15) While subsidies and other incentives in Germany and Japan have encouraged production and lowered the price of renewable energy technologies, allowing companies from those countries to become involved in far-flung projects such as the plant in China, U.S. policy has been "piecemeal and erratic," discouraging investment. (16) Federal tax credits, for example, are constantly lapsing before eventually being reapproved, if at all. (17)

   The United States is also losing the opportunity to gain valuable experience in industrial efficiency and emissions credits (18) trading, two ways in which Kyoto Protocol Parties are achieving compliance with their emissions reduction targets. British Petroleum (BP) instituted a companywide emissions reduction scheme and, in the words of the CEO, "added around $650 million of shareholder value, because the bulk of the reductions came from the elimination of leaks and waste." (19) London--not New York--has become home to the burgeoning emissions trading market. (20) With individual trades of 100,000 credits not uncommon (21) and the price of an individual credit (representing one metric ton of carbon dioxide or equivalent GHGs) as high as 31 Euro, (22) companies in a position to sell credits--having met their Kyoto Protocol obligations through improved efficiency, for example, and reaping the financial rewards of that as well--stand to make a tidy profit. The activities of Kyoto Protocol Parties have not gone unnoticed in the United States, where a number of business leaders see the imposition of emissions restrictions--if not outright accession (23) by the United States to the Protocol itself--as an eventual reality in this country, and worry that they are losing ground to overseas competitors. (24)

   Finally, the United States may come to regret its rejection of the Kyoto Protocol for another reason: American companies could find themselves cut out of the bidding processes for CDM projects. The CDM allows the transfer of emissions credits to developed countries or their companies in exchange for participation in GHG-reducing projects in developing countries. Examples of current and proposed projects include an Anglo-Japanese landfill gas management project in Brazil and a Dutch windfarm in China. (25) Almost half the turbines for the windfarm project will come from GE's Wind Energy division, underscoring the opportunities renewable energy companies could expect from full U.S. participation in the CDM. (26) Sweetening the deal for Kyoto Protocol Parties is the World Bank which, through a number of "carbon funds," is providing low-priced emissions credits (by purchasing those credits and then pooling them for sale to groups of buyers) and brokerage assistance to companies and states that engage in CDM projects. (27) But without American ratification of the Protocol, U.S. companies could either be shut out of such project negotiations entirely or, at the very least, find themselves competing with companies for whom offsetting emissions, not financial gain, is paramount.

   This Comment discusses American non-participation in the Kyoto Protocol and its economic implications for U.S. companies and the economy in general. Part II introduces the Kyoto Protocol and describes the United States' response to it under the Bush Administration. Part III examines the lack of a consistent focus on renewable energy by the U.S. government as contrasted with the policies of Kyoto Protocol Parties, both in terms of the domestic market and overseas opportunities, and the increase in industrial efficiency expertise in countries that have ratified the Kyoto Protocol. Part IV considers the growing emissions trading market in view of the possibility that American companies may soon find themselves at a competitive disadvantage in that area. Part V indicates the nascent CDM system is likely to handicap U.S. companies that could otherwise be top bidders for projects in developing countries. As to the overall question of whether the U.S. economy will suffer as a result of the Bush Administration's stance on the Kyoto Protocol, Part VI concludes that it most likely will and that the administration may have reason to regret its decision even before it leaves office.

2. THE KYOTO PROTOCOL: BACKGROUND AND THE U.S. RESPONSE

   Before examining the impact of the U.S. withdrawal from the Kyoto Protocol, it is important to understand how the Protocol works and why the Bush Administration objects to it. In 1992, the United Nations Framework Convention on Climate Change (28) was signed in Rio de Janeiro. Although it lacked any binding targets or fixed timetables, it laid the foundation for later agreements by committing the parties to the convention to beginning the process of formulating national climate change mitigation policies. (29) It also established 1990 as the baseline year for the parties to use in developing their GHG-reduction targets. (30)

   The Kyoto Protocol, (31) an addition to the UNFCCC, was adopted in 1997 and came into force in February 2005 after Russia added itself to the list of 141 ratifying countries. (32) The stated aim of the parties to the UNFCCC was to stabilize "greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system." (33) Those gases include: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride. (34) The Kyoto Protocol's plan to achieve that goal involves specific emissions reduction targets within a specific timeframe for most of the developed countries among its parties. (35) For example, if the United States became a Party it would be required to reduce its GHG emissions seven percent below the amount of its 1990 emissions (36) between 2008 and 2012. (37) Iceland, by contrast, is allowed to increase its emissions by ten percent. (38) Such a surplus of emissions capacity is known as "hot air." Russia is probably the biggest winner in terms of hot air. Its target under the Kyoto Protocol is zero percent (i.e., it needs to be at or below its 1990 levels by 2012), (39) but the collapse of its economy after the 1990 benchmark left it with a thirty-percent emissions Surplus. (40)

   Emissions credits (41) are issued to countries by the CDM Executive Board based on their original emissions targets and...