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    « The People Vs. WikiLeaks | Main | The Pope, The Condoms, HIV & Rise Of Catholicism In Africa »

    The Kyoto Protocol: The Politics & The Economics Of Global Carbon Trade

    The 16th annual United Nations Climate Change Conference (COP16), taking place right now in Cancún, Mexico is turning out to be another disaster just like the one in Copenhagen last December. Any hopes of extending the Kyoto Protocol (KP) beyond 2012 when it is now set to expire were officially derailed when Tokyo announced earlier this week that it would not support such extension.

    Japan wasn't the only country opposed to extending the KP. Russia, Canada and Australia are on the same page as Japan, while others mainly developing countries, and most notably China were quite vocal in expressing their displeasure about not extending the KP. On surface it would seem that Japan, Russia, Australia and Canada perhaps don't care as much about the environment and global warming as some of their counterparts. But that is not the case. If only politics was this easy and straight forward. 

    Let us first understand what the KP is all about before we get into the economics and the politics of it. The Kyoto Protocol is the biggest international binding agreement of it's kind, linked to the United Nations Framework Convention on Climate Change (UNFCC) which was adopted in Kyoto, Japan, on 11 December 1997. It officially entered into force on 16 February 2005. The main aim of the KP is to reduce the emissions of GHG (Green House Gases), by placing the responsibility of doing so primarily on the industrialized or developed nations.

    The rationale for giving the developed nations the burden of reducing the GHG emissions was that because of almost 150 years of industrial activity, these nations were believed to have historically contributed the most to the global pollution. Under the KP, 37 countries have officially committed themselves to reducing the emissions of four GHG (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride) to a level at least 5.2% lower with respect to the existing levels in 1990. The US despite being the #1 developed country has never ratified the KP, but more on that later.

    Countries & Kyoto Protocol. Image Source: Wiki

    The adjoining map of the world shows countries which have ratified the KP. In the map, Green: States fully committed to the KP, Yellow: States with partial commitment to KP and Red: Not committed at all to the KP. 

    The KP mandates that most of these emission reduction targets must be met through 'national measures', which means that countries must employ greener practices within their territories aimed at reducing GHG emissions. But in recognition of the fact that just measures within a country may not suffice to significantly reduce the GHG emissions, KP made available as an option the mechanism of 'carbon trading'.

    The KP allowed for developed nations to offset some of their emissions by purchasing carbon credits through a variety of programs in other, primarily developing nations. The rationale for allowing the developing nations to offer carbon offsets to the developed countries was twofold: 1) it is cheaper and more cost effective to employ such measures in the developing world, and 2) it brings in money into the developing economies from the developed ones, thus boosting their growth. 

    Here are three mechanisms that are officially recognized by the KP as means of carbon trading: 1) Emission Trading: Under KP, countries are allowed certain amount of emissions measured as 'emission units'. The Emission trading refers to the provision under KP (per Article 17) which allows countries which have a surplus of emission units left - the ones that they have not used - to trade those to other countries (for profit) who may need them. So for instance, if a country A has used only 6 out of it's allowed 8 units, it can sell the extra 2 unused units to a country B with higher emissions which has used all of it's allowed units and is still in need of more. 

    2) Clean Development Mechanism (CDM): Article 12 of KP helps countries with the responsibility to reduce GHG emissions (i.e. developed countries) to meet their target of GHG reductions by implementing projects in the developing countries that are aimed at reducing GHG emissions, like e.g. investing in wind power, hydropwer etc.. In exchange for it's investment in the CDM projects the developed country earns what are known as 'carbon credits' or CER (certified emission reduction) credits. 

    3) Joint Implementation (JI): Article 6 of KP allows countries which are required to reduce the GHG emissions to earn what are known as emission reduction units (ERUs), by investing in projects aimed at reducing GHG emissions in any other country. This allows countries to choose projects in countries where it may be more cost effective to do so than domestically. 

    Despite the fact that the then VP Al Gore was one of the key figures in putting together the KP in 1997 during the Clinton administration, the US Senate voted against it and as such the US never signed on to the KP. The main reasons for that: 1) US has argued that such binding commitment to reducing GHG emissions will likely hamper it's industrial and economic growth, and 2) it opposed the idea of classifying the countries based on 'historic' emissions of GHG, rather than 'current' emissions.

    The US believed that developing countries like China and India are unfairly exempt from a binding obligation to reduce GHG emissions under the KP, merely because of their classification as developing countries despite the fact that they are huge emitters of GHG due to their recent growth and development. This is precisely the reason why Japan, Australia, Canada and Russia are now refusing to extend the KP at Cancún. In the end, despite the fierce criticism that the US faced over the years for not ratifying the KP, it turns out that the logic used by the US has prevailed.

    CDM/CER Market Share (In 2008), Image Source:Wiki

    Carbon which is now a highly lucrative commodity for trading has evolved into a trillion plus dollar market globally. China, which is the world's leader in the CDM market has benefitted immensely from the KP. PRC, despite being the #2 economy in the world today is still classified as a 'developing economy', and as such is exempt from any binding obligation to reduce it's emissions. This is despite the fact that the Paris based IEA's (International Energy Agency) most recently released data in July 2010 certifies PRC as the world's  biggest energy consumer. PRC, which is also the world's biggest user of coal - one of the dirtiest fossil fuels - surpassed the US in 2007 as the world's largest emitter of GHG. 

    Moreover because of it's status as a developing economy, it has earned billions in hosting CDM projects that help offset emissions for the developed countries. In essence PRC is in a win-win position, which explains it's vocal outrage at not extending the KP.

    If China were to be reclassified as a 'developed economy' (and there's no reason why it shouldn't be) and or the classification of the KP were to be revised (which is what Japan is demanding), to choose those nations with 'current' levels of emissions for bearing the burden of reducing the GHG emissions rather than 'historic' emissions, it would be a significant setback for PRC. One, it might then be obligated to reduce it's enormous emissions which could derail it's massive economic and industrial growth and two, it would then not be in a position to offer CDM projects to other developed countries (because it would no longer be a 'developing' economy), which means a loss of billions of dollars of revenue. 

    At least part of the reason why Tokyo is being so vocal in it's stand against extending the KP is because it's still fuming over the Chinese trawler incidence (from September of this year in the Senkaku islands), and Beijing's subsequent halting of rare earth minerals' export to Japan. Add to that the recent insult of PRC snatching the title of the world's #2 economy from Japan. To put it mildly, the relations between the two nations have been severely strained in recent times. 

    Tokyo has a strong ally in Washington in it's diplomatic war against Beijing. It's theoretically possible but realistically highly unlikely that Tokyo's such staunch antagonistic stand at Cancún is not (privately) blessed by Washington. Japan putting such public pressure on China at the risk of derailing the KP not only proves the US to be the smart one after all - which saw this fiasco coming more than a decade ago and never signed the KP - but it is yet another way to corner Beijing. It publicly exposes Beijing's hypocrisy in supporting the KP, as conditional and based solely on selfish interest - only if the present structure prevails in which PRC has a lot to gain and nothing to lose. PRC for it's part, will fight any change in KP's existing classification of nations, tooth and nail, with all it's political and economic might.

    In this political fight what seems to have taken a backseat is ironically what was meant to be helped the most by the KP - the environment. 

    ~ Gauri

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