CSE- Climate Change Briefing Paper Section

2. The politics of "meaningful participation": how meaningful is meaningful?

p2_3.jpg (11562 bytes) A. Will the US ratify the protocol? India and China hold the key
In the pre- and post-Kyoto world one thing remains the same. According to US senators it will be countries like India, China and Mexico which will decide if the US will ratify the Kyoto Protocol. The US position has been carefully orchestrated that its action will be dependent on the action of developing countries. In the pre-Kyoto days, the US industry launched an advertising blitz to convince the public that a strong treaty on climate would, on one hand, increase the prices of everything — from oil to eggs — and, on the other hand, developing countries like India, China and South Korea will get a free ride while US consumers will foot the bill. Industry stressed it would lose its competitive advantage.

The US position has been carefully orchestrated to be dependent on the action of developing countries

This position became the pillar of US negotiations — and remains so. President Clinton clearly stated that his country will not agree to "binding obligations unless key developing countries meaningfully participated in this effort."

In July 1997, the US senate passed a 95-0 non-binding Byrd-Hagel resolution which called on the president "not to sign any treaty or agreement in Kyoto unless two basic conditions were met. First, the resolution directed the president not to sign any treaty that placed legally binding obligations on the United States to limit or reduce greenhouse gas emissions unless the protocol or agreement also mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for developing country parties within the same compliance period. The second requirement of the resolution was that the president should not sign any treaty that would result in serious harm to the economy of the US."

This resolution continues to shape the US position. Responding to criticism by John Passacantando, director of an NGO called Ozone Action, Senators Robert Byrd, a Democrat and Chuck Hagel, a Republican, defended the role of the Senate in determining the US policy on climate change. "Our legislative branch is not meant to be a rubber stamp for our executive branch. The administration can negotiate but only the Senate can provide the consent necessary to give any treaty the force of law in the US." They insisted also that "the agreement reached in Kyoto does not meet either of the criteria laid out in the Byrd-Hagel resolution." And until the tests were met, the protocol should not be signed by the President³.

What is now also evident is that the US negotiating position is crafted on this basis. Its first step was to ask for something vague and undefined as "meaningful participation from developing countries" so that the ball would move to developing countries to say what they could do and of course, the US could easily dismiss it as "not meaningful enough". If the US had proposed, most likely, everyone would have opposed. Therefore, it was best to leave it undefined, but threatening. The US strategy also included making it clear that it would walk out of the Kyoto protocol unless developing countries proposed actions that the US considered "meaningful".

Its second step was to get as good — or weak — an agreement as possible in Kyoto, make it clear it was a partial solution and not try for ratification immediately.

And its third step was, or is, to use the threat of non-ratification and opposition from the Senate unless there is "meaningful participation" from the developing countries. On December 8, 1997 Vice President Al Gore told a press conference in Kyoto that "in order to sign an agreement, or in order to send an agreement to the Senate, we must have meaningful participation by key developing countries." Gore stressed again at the end of Kyoto, "lets be clear, we will not submit this agreement for ratification until key developing nations participate in this effort."⁴

The pressure on the developing countries will therefore mount as the world’s media targets their attention on their non-participation, which will be seen as holding up ratification by the US. Everyone knows that without the US, the Kyoto protocol is meaningless. And every effort will be made to bind the "reluctant" developing countries in the interest of "us all".

B. Clean Development Mechanism: inequity in dealings
Meaningful participation is being defined in many ways. Depending on the interests of the party involved. p2_4.jpg (11830 bytes) One such approach is to use the Clean Development Mechanism (CDM) of the Kyoto Protocol.

The Clean Development Mechanism is as unclear as it possibly is unclean. Southern governments that had staunchly opposed the Joint Implementation — project based investment to get carbon credits — accepted it simply because of a change of the name, from the hated Joint Implementation to a softer (more money-sounding) Clean Development Mechanism. It will be recalled that in its first incarnation, the Global Environment Facility was called the Clean Development Fund and it is quite possible that negotiators in Kyoto halls had wool pulled over their sleepy eyes. It is interesting that the CDM was proposed by Brazil, but as part of a comprehensive burden sharing strategy. But the present CDM, taken completely out of context, is only Joint Implementation and should be renamed as such.

The Clean Development Mechanism is as unclear as it is unclean

Take away the confusing words surrounding each sentence and what is left of this article 12 of the Kyoto Protocol:

1. The purpose of CDM is not to help the South but explicitly to "assist" industrialised countries to meet their commitment to reduce emissions. Therefore, it is designed to help the rich and not the poor. Assisting the poor to achieve sustainable development is hogwash.

2. Under CDM, countries which have commitments to curtail their emissions can invest in projects in developing countries and will buy certified emission reduction. Or will get the credit for the saving in carbon dioxide emission in their own balance sheet.

3. CDM will be supervised by an executive board (EB). But as this is a market based instrument, the Board at best will have nominal role to play.

4. The saving in the emissions will be certified. This is a normal trading practice which allows the investor to get the best choice and promotes competition. Under the CDM, the Board will authorise numerous certification agencies that will assess the internal compliance and reporting mechanisms of the country selling the emission reduction units. The rating firms — like investment rating companies — will rate the "compliance capability" of developing countries. This will force the developing countries to compete with each other providing the rich North a cakewalk option; "cheapest, most efficient" portfolio of projects to invest in and take carbon credits for.

5. CDM will assist in providing funding. This is a clear example of putting in a few words to cajole and bribe the negotiators of the South. CDM is a clear market- based instrument. The North wants to buy and wants to pay as little as possible for it. It will invest in projects and will buy emission units. There is no additional aid or technology transfer which is promised.

6. CDM will allow the participation of private and public entities. Therefore, not just governments but also multinational corporations can enter into deals with Southern corporations to buy and sell their emission units.

The South must call a spade a spade and must develop its own positions in full knowledge of its own costs and benefits. The scramble for a piece of the brokerage — a percentage of the transactions costs has already begun and meetings are being held to convince the South to succumb to this temptation.

The US proposes to pay as little as US $14-23 per tonne for its emission credits. Their cost for domestic emission reduction would have been US $125 per tonne

Speaking at a recent meeting organised by the Delhi based Tata Energy Research Institute — interestingly sponsored by the JUSSCANNZ group of countries (Australia, Japan, Norway and United States) who have launched the Kyoto initiative to get developing countries to agree to commitments, John Palmisano, director, Environmental Policy and Compliance of Enron International said," CDM is the son of JI. For anyone shopping for cheap emission reduction options, the first option would be CDM — project investment in the South — then JI — project investment in Eastern Europe and Russia, and last would be to look at action to be undertaken domestically."

The key issue is price. What price would the South be paid for its emission units? The interest of the North is to buy these emissions as cheaply as possible. The US administration’s calculations for its bill to meet the Kyoto commitments is "modest" according to its official position simply because it plans to buy as much as 93 per cent of its emission units at the cheapest cost in the market place. The US proposes to pay as little as US$ 14-23 per tonne for its emissions credits. The price the country would have to make for domestic emission reduction programme would be US$ 125 per tonne.

The interest is to bargain for the "cheapest and most efficient deal". One approach to get the best deal is to develop a portfolio approach which drives each project to compete against each other. Effectively leaving the buyer to pick and choose and arm twist for the best option. The World Bank’s Prototype Carbon Fund is one effort in this direction (see box). The Bank has received funding from a number of utility companies and Scandinavian governments to start developing a portfolio of projects from the South. The Bank expects to play the role of an "honest broker" in this trade. The Bank expects to get clearance from its own Executive Board for this proposal in early June and then plans a meeting with its investors in Helsinki to finalise the Fund.

World Bank: the honest broker in the business of selling emissions

The World Bank has a most ingenious proposal in which the Bank would buy and sell, as the most "honest broker", the rights of present and future generations of Indians and Africans and all other such poor nations to the common atmosphere. And would sell their rights so cheap that even the American Indians who sold New York for a few beads, or the Russians who sold Alaska for a song — would be rich in comparison.

The proposal is to set up "global markets for greenhouse gas investments": recently renamed as the Prototype Carbon Fund.

This idea has been around for some time under the name of ‘Joint Implementation’. The World Bank with its Carbon Fund is keen to join the ranks of a growing number of "honest brokers" who see lucrative deals to be made. The establishment of the prototype is scheduled for May 1998 with an initial commitment from utilities and oil companies like British Petroleum and a number of Scandinavian and European governments totally to US$ 100 million. Five projects in Poland, Russia, Hungry, Latvia and Indonesia have been identified and are in the project pipeline. The price range is expected to be US$ 10-30 per tonne of carbon. For instance, while the domestic abatement option for upgrading a gas fired plan in Norway costs US$ 60 per tonne, the cost of financing a technology switch for a low-efficiency coal power station in India is US$10/tonne of Carbon. The profit made by Norway would be US$ 50 per tonne.

The Bank has set up an investment fund to develop a number of projects with the potential for reducing global warming in countries which have a low contribution to the warming of the atmosphere. It would then sell these projects to prospective countries who are interested in reducing their greenhouse gas emission. This makes good economics for some, as cutting future carbon dioxide emissions in industrialised countries will be more expensive than cutting future carbon dioxide emissions in developing countries. This is because developing countries are using outdated technologies which are very energy inefficient, whereas developed countries are already using very energy efficient technologies. So if an industralised country wants to cut its carbon dioxide emissions it would financially assist, say India, to acquire more efficient power stations, but the credit for the saving in carbon dioxide emissions would go to the industialised country paying for the power station. It is similarly argued that developing countries can be given money to plant trees on a big scale to fix carbon dioxide, because it would be cheaper to plant trees in developing countries instead of developed countries.

Some call this — and the Bank clearly concurs — the win-win option. The industrialised world does not make "expensive" adjustments to its economy which would render its industries uncompetitive in the global market place and the developing world gets some money for reducing its emission. A perfect bargain in such an imperfect world ! Until you start asking questions.

Firstly, accepting this scheme would mean that the developing countries would use up their cheap options for reducing emissions and not even get the credit for it in the global balance sheet of emissions. But once they have reached high levels of energy efficiency, industrialised countries would have no economic incentive to invest in developing countries. They would rather invest in their own countries. And if global warming is still a threat — as it would be because industrialised countries have not taken any action at home — then there will be pressure on developing countries to cut back on carbon dioxide emissions on their own. And then the costs of cutting back on carbon dioxide emissions will be very high. So what will be the form of international cooperation then?

Secondly, what the Bank’s proposed investment scheme does — so brilliantly and so ingeniously — is to further reduce the cost for the industrialised world. It creates competition -- and forces developing countries to outbid each other to sell their rights to the atmosphere as cheaply as possible. The World Bank’s draft paper says this approach" would lower the costs of reducing global emissions substantially". What this means is that industrialised countries would be given on a platter, an option of schemes which allows them to pick the cheapest carbon dioxide reduction investment.

Thirdly, and most importantly, this so called buying and selling take place without any property rights framework which is so essential for market based systems. How can one determine a price or bargain for rights without any clearly defined entitlements to the property. The atmosphere is a global common. The developing countries are being asked to sell their resource in the absence of property rights — only a temporary and increasingly vague understanding that these are low emitting countries. How can the World Bank call this a "market framework" for investment? A market framework would mean that the quota — or entitlement of each country to the global atmosphere — is established. Then these entitlements which we believe should be fixed on a per capita basis, can be traded to allow low level polluters to sell their unused emissions with high level polluters. Without these entitlements, developing countries are mortgaging their future.

A leading US scientist has termed the overuse of emissions by the industrialised North as its "natural debt" to the world. Comparing it to the financial debt which cripples many Southern nations today, he says that the North has for its development borrowed — way beyond its share — from the natural capital of the world. The World Bank, in its magnanimity, would allow the North to write off this liability — without any interest — in this wonderful new scheme.

Interestingly, the Bank’s proposal has reportedly run into hot water with the US administration. The treasury – which coordinates the Bank’s activities has allegedly put on record that it is against any effort to increase the price of carbon units. Under the Bank’s proposal the industrialised countries would have to pay a nominally higher rate per tonne of carbon. This approach of the cost-plus is not favoured by the administration which would like the market- minus approach. And this when the price that is being discussed is only US$ 20-30 per tonne in the early years, stabilising to US$ 10 per tonne of carbon units bought.

It is vital for the South to understand the implications of this cost issue. It has to realise that the cheap option that it is offering the North today will be at a heavy cost to it in the future. Developing countries will use up their cheap options for reducing emissions and not even get credits for it in the global balance sheet. And when the South has reached high levels of energy efficiency and the cost of curtailing emissions will be high domestically, the North will have no economic incentive to invest in these countries. And if global warming is still a threat — as it is most likely to be with the industrialised countries not taking any action domestically — then the pressure will mount on developing countries to take the tough expensive route.

The market is so distorted simply because it has no rights of property — of the sellers in this case. It is vital that a clear system of entitlements is set up so that the market can function with the property rights clearly defined and enunciated.