Domestic inaction: US politics heats up
In the US, domestic politics is gearing up for a round of shadow boxing before the world. No sooner does the US president flex his muscles on climate change which he called "the biggest challenge facing civilisation worldwide"¹⁰ does the powerful Congress slap him across the wrist.

Yellen testified that the US would experience only a "modest" economic impact from meeting the protocol’s obligations

In April 1998, the Clinton administration was to announce a $6.3 billion five-year package of tax incentives and research to improve energy efficiency. But even before the package was announced senators had put spokes in the wheel of this grand design. In early May, Republican senators, John Ashcroft from Missouri and Joe Kollenberg from Michigan had introduced bills to block the administration from spending money on these programmes unless the senate ratifies the agreement in Kyoto. Kollenberg, a bitter critic of the Kyoto protocol, calls it "a terrible deal for the United States which the Senate would reject". He believes that the Kyoto protocol which only requires the industrialised countries to cut emissions will give the developing countries such as China and Mexico an unfair competitive edge¹¹.

Also, in May, another global warming controversy started brewing as the White House refused to turn over information requested by the US House Oversight Panel, which is beginning its hearings to consider the US commitment under the Kyoto treaty. On May 13, the panel heard Janet Yellen who testified that the administration’s economic analysis found the US would experience only a "modest"economic impact from meeting the protocol’s obligations. However, the subcommittee remained unsatisfied with the numbers provided and on May 20, Republican Senator David McIntosh had given the administration the final ultimatum to turn over its economic analysis or face subpoenas¹².

President Clinton has meanwhile unveiled a new plan — this time aimed at the household energy sector — to cut energy use in American houses by 50 per cent by 2010 through better windows and insulation, energy saving appliances and more efficient heating and cooling systems. Under this plan a collaborative research and implementation agenda has been set up under the Partnership for Advancing Technology with US$ 70 million in the kitty¹³. And while the Clinton administration continues to argue that emission trading and tax incentives will create new markets and export opportunities for the US, the Congress is adamant. "There will be no implementation of the Kyoto protocol and no funds expended," says Republican Senator, Chuck Hagel.

Investing in projects and buying emission units
The Kyoto protocol provides under article 6 that parties in Annex 1 (industrialised countries) can agree to invest in carbon efficient projects in each other’s countries and can buy and sell emission units: Joint Implementation, but restricted to the industrialised countries.

The first such post-Kyoto deal has been struck between two most likely partners: Russia and Japan. Japan has to meet a difficult target of 6 per cent cut from 1990 levels, while Russia can easily meet its target of zero per cent rise in emissions because of the shutdown of inefficient industries.

Under the agreement between Russian president, Boris Yeltsin and the Japanese Prime Minister during their recent summit meeting, Japanese companies would invest in 20 Russian power plants and industries to cut greenhouse gas emissions. These reductions of Russian emissions would be added into the Japanese carbon dioxide balance sheet. Japan’s trade ministry has allocated nearly US$ 20 million in the current annual budget to help Japanese firms to carry out feasibility studies for possible joint implementation in foreign countries.¹⁴

Trading in emissions and ...swapping "hot air"
The atmosphere is increasingly becoming an intensely traded commodity. Seeing the opportunity in buying and selling permits to pollute a number of agencies and companies are setting up businesses to manage this dirty air. Article 17 of the Kyoto Protocol says that the conference of parties (CoP) shall define the relevant principles, modalities, rules and guidelines for emission trading. But without much ado and without waiting for the CoP to define principles, emission trading is starting to take place. Interestingly, petroleum companies — the prime causes of greenhouse gas emissions — are beating everyone at the game. The earliest entrants are:

• British Petroleum (BP) is going to use its sprawling oil company as a testing ground for emission trading. Various units of BP will buy and sell permits to emit carbon dioxide. This will help develop uniform ways to measure and limit emissions of carbon dioxide and assist BP to reduce its global carbon dioxide output.
• The oil giant Shell is considering a plan to launch an international market in carbon dioxide permits. In early May, Shell broke the ranks of the climate-opposed — it announced it was leaving the Global Climate Coalition which lobbies against limits on carbon emissions. "I find myself increasingly persuaded that the climate effect may be occurring," said Mark Moody-Stuart who is slated to become Shell’s CEO in July¹⁵.
• On May 6, London-based International Petroleum Exchange announced its proposals to develop trading in carbon dioxide permits. IPE is prepared to launch a carbon dioxide emissions futures contract valid for a month.Under the IPE proposals, government would legislate and play a part in the allocation process before free markets were allowed to evolve. Emission trading would allow companies to emit as much pollution as they had permits for. Those that cut back on emissions with energy efficiency measures could sell or lease their surplus permits. IPE expects two separate markets to evolve; first, a primary market of bilateral deals between individual companies. Second, a secondary market to provide additional flexibility to all participants to assist in credit management and to provide greater transparency and liquidity¹⁶.
• The United Nations Conference on Trade and Development (UNCTAD) is working towards a deadline of setting up an emissions market by 2000.
• On May 21-22, 1998, a emission trading conference was held in Canberra, Australia. It is understood that the Australian government is considering launching a tradable emissions programme. The conference organiser — the Executive Director of ABARE, was a member of the Australian negotiating team in Kyoto.

The evolving framework for emissions trading
The current proponents of emissions trading are very "simplistic" in their view of this system. All they say is needed first is a source of pollution which can be measured and monitored and a market place of polluters willing to accept and trade in permits. Second, what is needed, is to have legally binding targets. These were introduced, for the first time in Kyoto. The stage is then set.

Emission trading is starting to take place without waiting for the CoP to define principles, and petroleum companies are beating everyone at the game

The only issues before this group of traders is, first, who should trade — government or private parties? The US government suggests that governments should be allowed to trade with each other. But then how will the system avoid what is known as "hot air trading" and ensure that all parties have sufficient incentives to reduce actual pollution. Adair Turner, director general of the Confederation of British Industry argues that "emission trading should only take place between companies and not between countries, and adjustments should automatically be made to a country’s achieved levels when the intercompany trade is carried out."¹⁷

Second, should the government charge for initial permits or issue them free to existing polluters. But this would restrict new entrants to the market once the allocation is complete¹⁸.

"We want to make sure we are not creating a new crop for nations to sell

The term "hot air" is being furiously debated in this context. Some economists believe that "in the short term you may get a certain amount of hot air trading but in the long term it has to be good for the environment" .

But there are critics as well. Ambassador Raul Estrada-Oyuela who chaired the Adhoc Group on the Berlin Mandate, has said that emission trading will have to go, over a phase out period of 8 years. "We want to make sure we are not creating a new crop for nations to sell." Estrada was responding to concerns expressed by developing countries that emission trading would create a market for cheap emission reduction options¹⁹.

The most important issue is — allocation of rights to trade — has been completely marginalised in this debate.

1. Fred Pearce 1998, Playing dirty in Kyoto in The New Scientist, 17 January, London.

2. Fred Pearce 1997, Dishonest brokers in The New Scientist, 6 December, London.

3. Robert C.Byrd and Chuck Hagel 1998, Advice to heed on the Kyoto treaty, Washington Post, May 6, Washington.

4. Anil Agarwal 1998, Lifting the veil, in Down To Earth, January 31, New Delhi.

5. Anne Goodman 1998, Carbon trading up and running in Tomorrow, Global Environment Business, number 3, volume VIII, June 1998, Stockholm.

6. Rajat Banerji 1998, The way of all waste, in Down To Earth, March 31, New Delhi.

7. 1998, G8 Final Communique, May 17 Birmingham.

8. Michael Meacher 1998, speech at the Globe International Launch of "contraction and convergence" in the house of commons 14 May, London.

9. 1998, Sustaining the American way of life in DTE/CSE supplement on global environmental governance, Centre for Science and Environment, April 30, New Delhi and 1998, Clinton economist predicts small costs for warming treaty, meets skepticism, Wall Street Journal, March 5, Washington.

10. 1998, Clinton warns on global warming, UPI, San Fernando, California May 4.

11. 1998, US house bill would block spending to curb carbon, Reuters, May 6, Washington.

12. 1998, Cost estimates of US climate policy debated in house hearing and White House continues to provide few details about cost estimates of climate policy (weathervane).

13. John M.Broder, 1998, Clinton unveils plan to help homes use less fuel, New York Times, May 5, New York;

14. 1998, Japan and Russia conclude landmark greenhouse gas swap, Reuters News Service, April 19, Kawana, Japan.

15. Brad Knickerbocker 1998, Global warming debate cuts two ways, Christian Science Monitor, May 11, Boston.

16. Gautam Malkani 1998, IPE calls for CO₂ emission permit trading, Financial Times, May 6, London.

17. 1998, Dow Jones Newswires, May 11, London.

18. 1998, Of a grey market, Financial Times, April 16, London.

19. 1998, Emissions trading in warming pact may be phased out, Wall Street Journal, March 3, Washington and Short-lived scramble? in DTE/CSE supplement on global environmental governance, Centre for Science and Environment, April 30, New Delhi.