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Tuesday, March 29, 2005

The price of a clean project


On March 28, 2001, U.S. President George W. Bush declared that the United States would pull out of the Kyoto Protocol for two reasons: The protocol was imperfect because it did not require developing countries to cut their emissions of greenhouse gases, and it was detrimental to U.S. economic interests.

On June 11 of that year, Bush said the protocol had "fatal flaws," thus leaving no doubt that America would quit the landmark international agreement aimed at reducing the emissions of gases held responsible for global warming. The reasons Bush gave, however, do not make the protocol fatally flawed.

Japan reportedly plans to urge the U.S., China and India to join the treaty at London's Group of Eight summit in June. Tokyo must first examine fully what Bush means by "fatal flaws" and then prepare a mediation plan to try to correct the defects. Yet bringing Europe and America together will be difficult because of their ideological differences.

At first glance, "fatal flaws" imply that the protocol, even if fully implemented, will not do much to slow global warming. Closer analysis suggests the treaty could even hamper development of effective technologies for reducing carbon dioxide (CO2 emissions. I base this view on several years of discussions by climate-change scientists before the 1997 Kyoto conference. Their debate raised three questions:

* What should be the target -- an actual reduction in emissions flow, or a lower concentration in the atmosphere?

* Is it necessary to take early action, or can measures be put off?

* Do we set numerical-reduction targets, or use price-based approaches such as emission-credits trading?

The Kyoto Protocol adopted the first option in each case. But climate-change scientists who echo the views of the U.S. Republican Party support the second options. Which option is correct depends on one's ideology.

Before the Industrial Revolution, the CO2concentration in the atmosphere was about 280 parts per million (ppm). As a result of burning fossil fuels, the concentration increased and now measures about 380 ppm. Meteorologists say it must be held below 550 ppm to prevent global warming.

How should the concentration be capped? Is it necessary to set mandatory reductions on emission rates for developed countries? If so, is there an immediate need for action? And what is the best way to cut emissions from the standpoint of costs vs. benefits?

Another question is whether the protocol will hamper development -- for which a lead time of at least 10 years is required -- of large-scale technologies that could effectively reduce CO2emissions. Such technologies may involve CO2isolation, solar power generation and research and development of next-generation nuclear power.

On one hand, there are those who maintain that early action is needed as a precaution. They are skeptical of developing large-scale CO2reducing technologies, which they view as contributing to environmental degradation. They believe that conservation should take precedence over economic growth. Naturally, these people support the Kyoto Protocol.

Others have big hopes for technology. They believe there's nothing to lose if action is delayed. They favor large-scale centralized power generation, and argue that economic growth should come first when it conflicts with conservation. They do not back the protocol.

Is it any wonder that Russia took such a long time to ratify the protocol? After all, it can now expect to earn huge amounts of hard currency by selling a rare commodity known as emission rights. Before the U.S. withdrew from the protocol, estimated prices for emission rights were at least $50 per ton of CO2 After the pullout, prices plummeted to between $3 and $5. Russia sought a compensatory measure -- assurance of economic gain -- as a condition for its ratification.

Many think Russia has nothing to lose and everything to gain from global warming because it is in a cold climate. They are wrong. Global warming is melting permafrost and generating methane in the process. The flammable gas is already causing frequent forest fires. From January to August 2003, the amount of Russian forestland consumed by fire was equivalent to 60 percent of Japan's area.

According to a simulated calculation, were it not for the U.S. pullout from the protocol, total CO2emissions from developed (Annex 1) countries that signed on to the protocol would have risen 8 percent in 2010 from 1990 levels. With the U.S. opting out, Annex 1 emissions are expected to drop by more than 5 percent.

Consequently, the protocol's "clean development mechanisms" (CDM), which were designed to increase the use of emission rights for developed countries, will become unnecessary. And creating an emission-rights market for trading carbon credits will become less likely.

Without such a market, emission rights or carbon credits will have to be traded one on one. Since private companies are unable to estimate the value of carbon credits earned through investment in emissions-reduction technologies, there are likely to be fewer CDM projects than had been anticipated.

The Japanese government should encourage Japanese companies to undertake CDM projects by promising to buy at a fair price the carbon credits they earn through development. Prices should be set according to the domestic marginal cost of emissions reduction, prices in the European Union's carbon market and other relevant factors, and in ways that give domestic companies CDM incentives.

Without such measures, once the first commitment period under the protocol is over, Japan will have to purchase Russia's "hot air" through one-on-one transactions to acquire emission rights.

Takamitsu Sawa, a professor of economics at Kyoto University, is director of the university's Economic Research Institute.


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