Lessons from the kyoto protocol

Lessons from the kyoto protocol

(Parte 1 de 3)

Ambiente & Sociedade■Campinasv. X, n. 1■p. 27-38■jan.-jun. 2007

EliEzEr Martins Diniz1

1 United Nations Framework Convention on Climate Change

Since the United Nations Conference on Environment and Development (Earth

Summit) in Rio de Janeiro in 1992, the discussion of environmental issues has produced some concrete results. The problem of climate change has gained a special position within the research agenda.

The importance of the topic can be evaluated by the document United Nations

Framework Convention on Climate Change (UNITED NATIONS, 1992), a result of the above mentioned conference. Several preliminaries pointed out by the document are worth mentioning: a) Developed countries are responsible for the present level of emissions (and stocks) of greenhouse gases; b) Developing countries need to increase their levels of emissions as a result of their efforts to catch up with developed countries. Their priorities are the achievement of sustainable economic growth and the eradication of poverty; c) The principle of common but differentiated responsibilities.

(…) the widest possible cooperation by all countries and their participation in an effective and appropriate international response, in accordance with their common but differentiated responsibilities and respective capabilities and their social and economic conditions. (UNITED NATIONS, 1992, p. 2).

d) Environmental standards need to be tailor-made for each country. Inappropriate legislation can produce high economic and social costs; e) Policy measures to minimise climate change in developing countries must avoid adverse effects on economic development. Increases in energy consumption as a result of development should take into account the possibilities of greater energy efficiency and reduction of emissions; and

*I acknowledge financial support from CNPq (Conselho Nacional de Desenvolvimento Científico e Tecnológico, Brazil) in several stages of the research. Some preliminary results of the paper were obtained when the author was Banco

Santos Research Fellow in Economics at the Centre for Brazilian Studies, St Antony’s College, University of Oxford. Professor of Economics, Universidade de São Paulo – USP.

Corresponding author: Eliezer Martins Diniz, Departamento de Economia, Faculdade de Economia, Administração e Contabilidade – FEA-RP, Universidade de São Paulo – USP, Av. dos Bandeirantes, 3900, CEP 14040-900, Ribeirão Preto, SP, Brazil. E-mail: elmdiniz@usp.br

Received: 03/1/2007. Accepted: 16/5/2007.

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Ambiente & Sociedade■Campinasv. X, n. 1■p. 27-38■jan.-jun. 2007 f) Intergenerational concern “(…) protect the climate system for present and future generations (…)”. (UNITED NATIONS, 1992, p. 6).

The ultimate aim of the Convention is to stabilise greenhouse gas concentrations without harm to sustainable economic development, food production and natural adaptation of ecosystems. Developed countries should take the lead in obtaining a smaller flow of emissions in order to decrease the above mentioned concentrations. Cooperation is essential for a meaningful final result.

In order to attain this goal, the following measures were devised2: a) National inventories of greenhouse gases; b) Programmes to mitigate climate change; and c) Incentives to the adoption of cleaner technologies.

Promote and cooperate in the development, application and diffusion, including transfer, of technologies, practices and processes that control, reduce or prevent anthropogenic emissions of greenhouse gases not controlled by the Montreal Protocol in all relevant sectors, including the energy, transport, industry, agriculture, forestry and waste management sectors. (UNITED NATIONS, 1992, 4.1.c, p. 10).

d) Promote an increase in removals by sinks.

Promote sustainable management and promote and cooperate in the conservation and enhancement, as appropriate, of sinks and reservoirs of all greenhouse gases not controlled by the Montreal Protocol, including biomass, forest and oceans as well as other terrestrial, coastal and marine ecosystems. (UNITED NATIONS, 1992, 4.1.d, p. 10-1).

e) Return by the end of the decade to earlier levels of emissions of greenhouse gases.

The implementation of the Convention is performed by the supreme body of the

Convention, the so-called Conference of the Parties (COP). This body meets at least once every year to evaluate the implementation in the light of the reports provided by the Subsidiary Body for Scientific and Technological Advice (SBSTA), the Subsidiary Body for Implementation (SBI) and the countries themselves. Reports made by third parties are also sometimes examined (like the Intergovernmental Panel on Climate Change (IPCC), for instance).

Since the first Conference of the Parties (COP 1) in Berlin, in 1995, Brazil has consistently stressed two points: a) The need to properly evaluate the share of the responsibility of each country in the process of curtailing emissions (principle of common but differentiated responsibilities). This is achieved by using state-of-the-art knowledge and by taking into account the right of developing countries to experience sustainable economic development according to their own priorities; and

29Lessons from the Kyoto Protocol

Ambiente & Sociedade■Campinasv. X, n. 1■p. 27-38■jan.-jun. 2007 b) The fundamental contribution of the transfer of cleaner technologies to developing countries and to the success of the Protocol.

In Brazil (1997) the Brazilian government puts forward a formal proposal for a protocol. It was presented to the Ad Hoc Group on the Berlin Mandate in August 1997. The document focused on the above mentioned two points and proposed solutions.

Regarding the first point, the paper suggests the adoption of the growth in global mean surface temperature as the sole variable to measure climate change. This is a comprehensive measure as it reflects the impact of emissions of many greenhouse gases. This is an alternative to the traditional measure of emissions in a common carbon measure that uses the global warming potential to convert measures of different greenhouse gases.

The paper suggests that one can set reduction commitments for developed countries based on the induced temperature increase. It is possible to share the burden among countries and determine relative responsibilities based on this criterion. The countries responsible for larger increases in temperature would have the largest burden in terms of reduction commitments according to this criterion.

A penalty is imposed on countries that do not comply with their reduction commitments. It is the so-called polluter pays principle. The non-compliance mechanism devised by the Brazilian proposal is the Clean Development Fund (CDF). The monetary contribution to this fund is proportional to the difference between the effect of a country to climate change and its commitment. The resources are directed by the financial mechanism of the Convention to the developing countries with the highest flow of emissions. The bulk of the funds are used for climate change mitigation and a small share for adaptation projects.

The countries that have produced a temperature increase lower than their commitments may sell this difference at market price to any country that has not complied with its commitment. This is known as emissions trading. Any country must contribute to the CDF if it does not comply with the commitments and does not buy emissions from other countries in a sufficient amount.

As we shall see in the next section, the ideas related to the Clean Development

Fund were partly used in the Kyoto Protocol. Other propositions related to the share of the burden and the measure of climate change were the subject of technical discussions in the subsidiary bodies of the convention at the time of writing this paper. A controversial point is the use of temperature instead of gas emissions to evaluate the relative responsibility of countries and the commitments to be reached. This point can be better evaluated using the available evidence on the relationship between pollution and economic development.

Grossman and Krueger (1995) and Grossman (1995) show empirical evidence on this relationship between pollution and economic development3. In many cases we can find the following behaviour: at the beginning of economic development there is a direct relationship between pollution and output; after a point, we have an inverse relation. This curve with the shape of an inverted U is called the Environmental Kuznets Curve (EKC for short). Using these findings, we can say that economic development itself creates the conditions for pollution reduction. A detailed analysis decomposes the total effect in three parts isolated by Grossman: the scale effect (higher output is associated with higher pollution); the composition effect (a change in the composition of output by sector can diminish pollution if the cleaner sectors conquer a higher share); and the technique effect (adop-

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Ambiente & Sociedade■Campinasv. X, n. 1■p. 27-38■jan.-jun. 2007 tion of cleaner technologies diminishes pollution). We can explain the behaviour of less developed countries by the predominance of the scale effect. Developed countries that are in the negative sloped part of the curve have strong composition and technique effects, so that the scale effect ceases to be prominent. Stokey (1998) presents a theoretical analysis of this subject and shows the conditions under which the EKC appears in standard economic growth models. Chimeli and Braden (2002) take the previous analyses of Stokey and others as a starting point to make an alternative and less restrictive modelling of the EKC. Dasgupta, Laplante, Wang and Wheeler (2002) carried on a survey on the theoretical underpinnings and empirical evidence of the EKC with an optimistic view of its relevance. De Bruyn (2000) carried on another survey worth mentioning.

Taking the above evidence into account, one can say that the same type of argument may be valid for the matter of greenhouse gases (GHGs). If some type of EKC emerges naturally, then the passage of time is sufficient to diminish the GHGs. If the scale effect is prominent and no curve emerges (or emerges only for extremely high levels of income), then it is necessary to force a turning point in the curve. The non-emergence of the EKC may be seen as a Prisoner’s Dilemma with two agents: non-cooperation is good for one of the agents if both parts take opposite decisions (e.g. one agent adopts measures to curb GHGs emissions and the other does not – the latter takes the benefits without any cost); cooperation allows the agents to attain the best result for the group (e.g. both agents adopt measures to diminish GHGs emissions). Cooperation would force a turning point. There are many ways to induce cooperation. In the case of GHGs emissions, the adherence to a protocol with emission commitments has been chosen. If we have more than two agents, the analysis turns out to be a little bit more complex. A more complete analysis on forms to naturally induce a cooperative result can be found, for instance, in Axelrod (1984). Dasgupta, Laplante, Wang and Wheeler (2002) also discuss the role of the enforcement of environmental laws moving the EKC downwards and lowering the turning point. A protocol (cooperation by consensus) or a law (imposed cooperation) are two ways of obtaining the same result. The first one is more desirable, but the protocol must have no flaws in order to attain its objectives.

There is some empirical evidence related to GHGs and the EKC. We cite two papers representing different research strategies. Schmalensee et al. (1998) obtained an EKC for per capita carbon dioxide emissions and per capita output using cross-section data. The authors use their projections to criticise the IPCC’s methodology. Diniz (2001) studies the relationship between carbon dioxide emissions and output on the time domain for the Brazilian case. This incipient study sustains that the scale effect is prominent and there is no evidence of an EKC with the downward sloping part.

Models that try to integrate economic aspects of the question with other disciplines present problems not yet satisfactorily solved4. Nevertheless there is a growing body of research on this class of models, called integrated-assessment models, for instance Nordhaus and Boyer (2000) and Islam (2001). The main objections for this class of models are: the necessity to calibrate models using many different sources to provide estimates for some equations, instead of obtaining econometric reliable estimates from the available data for smaller-scale models; and the simulation of large-scale models of the black-box type that prevent any intuitive interpretation of the results.

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Ambiente & Sociedade■Campinasv. X, n. 1■p. 27-38■jan.-jun. 2007

Both classes of models that relate economic growth and environment do not encompass all the aspects related to the greenhouse gases: it is necessary to have different models to study greenhouse gases from fossil fuel use and from land use change, for instance.

Brazils proposal to adopt an index related to temperature can be questioned by the fact that it fails to consider the huge amount of empirical evidence and theoretical analysis just sketched. My personal opinion is that the cost involved surpasses the benefits of using a temperature index, as this type of analysis may be embedded in the integrated-assessment models, a class subject to a great deal of criticism. So we can identify a dispute between the Brazilian proposal of using a temperature commitment and the dominant position of adopting an emission commitment, a conflict apparently not yet solved. Despite this, it seems that the Brazilian negotiators are convinced that a temperature commitment is the best alternative to this day.

3 The Kyoto Protocol

The need to force a turning point in the emissions of some gases responsible for the greenhouse effect (the most important of which are carbon dioxide, methane, hydrofluorocarbons, nitrous oxide, perfluorocarbons, and sulphur hexafluoride, all of them with high global warming potential) led to a worldwide agreement known as the Kyoto Protocol. It deserves its name from the Japanese city where the compromise was reached in the third Conference of the Parties (COP 3) in December 1997.

The protocol consists of a set of explicit reduction commitments by developed countries, along with some programmes related to incentives to increase the removals by sinks and the transfer of cleaner technologies from developed countries to developed (Joint Implementation- JI) and to developing countries (Clean Development Mechanism – CDM). An investment that produces properly certified emission reductions in developed (through JI) or developing (through CDM) countries acts as if the investor had reduced the emissions of his own country. The main objective is to globally reduce the emissions as every emission contributes to the greenhouse effect (i.e. greenhouse gases have global effects). The same elements of the Convention and the bulk of the Brazilian proposal on the CDF are included in the Kyoto Protocol. More attention is given to the role of private investment in the transfer of technology. In the case of environmental problems, data cited in Forsyth (1999) for the period 1990-1997 show the growing importance of private-sector transfers from foreign direct investment: nearly US$ 250 billion against US$ 5.25 billion from Global Environment Facility.

The CDM was inspired by the Brazilian proposal of a CDF. The nature of the fund changed. The CDF was conceived as a non-compliance mechanism, with a penalty on developed countries that fail to perform at least as well as the proposed commitments. The CDM has a function to help developed countries to achieve their commitments. The first was a punitive device, and the second an additional instrument.

Some problems of the Kyoto Protocol must be discussed5: a) The use of removals by sinks as a form to mitigate climate change is controversial.

Some argue that reforestation projects do not address the main causes of greenhouse gas emissions (industrialisation and energy use). Another argument against this type

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(Parte 1 de 3)