Winners and Sinners on Global Warming

David B. Sandalow
David Sandalow, Inaugural Fellow, Center on Global Energy Policy, School of International and Public Affairs, Columbia University
David B. Sandalow Former Brookings Expert, Inaugural Fellow, Center on Global Energy Policy - School of International and Public Affairs, Columbia University

February 10, 2005

The auditorium in the Kyoto Conference Center was filled with sleeping delegates after two nights of nonstop negotiation. But Stu Eizenstat, head of the US delegation to the 1997 global warming conference, was wide awake with his arm in the air. Exuding energy, Eizenstat turned on his microphone and delivered a simple message—the “final compromise” just circulated for approval was unacceptable to the United States because it deleted all reference to “emissions trading.”

The conference chairman let silence fill the room, then said simply, “May I please see the US delegation in my office?”

Moments later, as we huddled in a small office, the chairman told US representatives we were the only delegation insisting on a controversial provision and implored us to accept an agreement without reference to emissions trading. Eizenstat refused. The chairman agreed to include the provision, returned to the auditorium, and soon afterward announced that the conference had adopted a new agreement. He proposed a name—the “Kyoto Protocol.”

More than seven years later, the agreement forged during those long nights of negotiation will finally take effect. On Feb. 16, the Kyoto Protocol—revered in much of the world, reviled by many in the United States—becomes legally binding on 131 countries that have accepted its terms. The most immediate impacts will be in the 35 industrialized countries, including Canada, Japan, and all members of the European Union, that have agreed to limit heat-trapping gases during the period 2008 to 2012.

The event is rich in irony. The United States will not be a party to the Kyoto Protocol. Indeed, the Bush administration’s rejection of the agreement has become a symbol of its foreign policy for much of the world. Yet the Kyoto Protocol’s most enduring legacy may be a uniquely American idea—that “emissions trading” can help control heat-trapping gases at low cost.

Today the European Union—an opponent of emissions trading during the Kyoto talks—is embracing an ambitious “cap and trade” program to help fight global warming. Meanwhile in the United States—birthplace of emissions trading and its strongest advocate in the Kyoto process—efforts to establish a national trading program for heat-trapping gases have stalled, with no progress in site.

What is emissions trading? It is an alternative to traditional regulation, in which market forces are used to help lower the cost of meeting an environmental goal. In a typical emissions trading program, companies are first given permits to release a pollutant and then given a choice—either use the permits or sell them. Companies that cut pollution cheaply make money by selling permits to companies where cutting pollution is more expensive. The result: An environmental goal is achieved at lower overall cost than under traditional approaches in which all companies must meet the same limits.

These programs have been wildly successful in the United States. In 1990, the first President Bush signed legislation creating an emissions trading program to help fight acid rain. Initial cost estimates ran from $400 to $1,000 per ton of pollution; actual costs have been $100 to $200 per ton thanks in part to the flexibility provided by emissions trading. Similar programs have been used with great success to control ozone-depleting chemicals and urban smog.

For US negotiators at the Kyoto conference, emissions trading was an important tool for overcoming two problems. First, during preparations for the conference, many economists and business groups argued that reducing greenhouse gas emissions in the amounts proposed by some countries would be ruinously expensive. Trading was seen as a powerful tool for cutting costs, in part because studies found many cheap opportunities for reducing emissions outside the United States. If the United States could pay for those reductions and get credit under an international trading program, our costs would be greatly reduced.

Second, emissions trading offered a possible solution to one of the knottiest problems in the negotiations—how best to engage developing countries. The vision was simple: Any developing country that agreed to accept an emissions target for greenhouse gases could make money by participating in an international trading program.

But in the months before the Kyoto conference, US enthusiasm for emissions trading ran into a wall of suspicion around the world. The idea was new to many countries and often described derisively as “selling the right to pollute.” Many countries saw cutting pollution as a moral obligation and were unimpressed by the economic rationale for emissions trading.

In retrospect, the US insistence on including emissions trading in the Kyoto Protocol paid important dividends. Trading programs are far more widely accepted today than seven years ago. Indeed, they are the foundation of the European Union’s new plan for controlling heat-trapping gases. (As of Jan. 1, more than 12,000 entities in the EU’s 25 member states have been allocated tradable permits for heat-trapping gases.) A European newsletter reported in 2002, “It was the Kyoto Protocol that put emissions trading firmly on the EU agenda for the first time.”

Still, with the benefit of hindsight, American hopes for emissions trading during the Kyoto negotiations seem overblown. The prospect of participating in trading programs has not induced developing counties to accept national emissions targets (or show any interest in doing so). As several commentators have noted, many developing countries lack the infrastructure to implement national emissions targets or participate in international trading programs. Idealism more than realism seems to have characterized early US hopes in this regard.

Which raises broader questions: What have we learned in the seven years since the Kyoto Protocol was adopted? Has the Kyoto Protocol been a success or failure?

In several respects the Kyoto Protocol has already been a historic success. The accord has led dozens of countries to adopt serious programs to address global warming, many for the first time. It has greatly improved understanding of the benefits—and limitations—of emissions trading. It has helped educate publics around the world about the risks of global warming.

In other important ways, however, the Kyoto Protocol has been a failure. Its rejection by the world’s largest emitter of greenhouse gases—the United States—severely limits its impact. The agreement’s impact on clean energy growth in developing countries will in all likelihood be modest. The next generation of global warming agreements must engage both the world’s biggest emitter and major developing countries.

Back in the Kyoto Conference Center, after the chairman’s announcement, the auditorium erupted in tumultuous applause. In the euphoria of the moment, hopes ran high. Since that night, we’ve seen that the fight against global warming will take many twists and turns. Our success will depend upon learning from each step and adjusting accordingly.