The Environmental Circus: Is Kyoto the Answer?

Recent times have shown us an exponential shift in focus over the environmental issues. The whole process started with the publication of Club of Rome report titled “Limits to Growth” in 1972, which was special in a sense that it used the most advanced research methodologies of its time to produce a strong warning for the policy leaders of the world. The Brundtland report “Our Common Future” (1987) provided another thrust in the whole process of environmentalism by giving the world the notion of sustainable development. Since then the environmental issues have been, some what, kept alive in our conscience, and at times blown to such proportions that the end of the world seems to be approaching in the not so distant a future. Notions, such as greenhouse effects, global warming, acid rains, etc. have become household names, and industries and development have been projected as the devils intent on ruining our beautiful world. Politicians, scientists, researchers, academics, marketing people, companies, governments, and even an Ex-Vice President of the most powerful nation of the world have jumped into the debate; NGOs have sprung up like mushrooms; and political parties have turned green. This all has created a “Circus” of sorts, where every “who is who in the Zoo of environmentalism” is performing to the tunes of environment.

By definition a circus is public entertainment consisting typically of a variety of performances, by acrobats, clowns, and trained animals who gather on a platform and amuses the public spectacles. Looking at the hype around environment does give me the idea of a global circus where every one is intent on terrifying the public and at times amusing them as well. Weather the evidence in support of this hype is convincing enough is another debate, which has been going on for quite some time, and probably will continue for coming decades, and I will not dwell into it. The question I would like to answer here is: Does Kyoto provide the answer to the environment question? For me the answer to this question is a flat NO. The reasons for my pessimism are many folds, and I will discuss some of them below.

Grandfathering of Allowances

Grandfathering mechanism is an important element of the Kyoto Directive which has been left open to Member States to allocate allowances across industries and installations. Grandfathering refers to free initial allocation of permits based proportionally to previous unregulated emission levels, and can be based on either output-based or emission-based approaches.

Grandfathering is a key drawback in implementation of Kyoto and can lead to efficiency losses. Efficiency losses will occur if firms can increase their grandfathered amount by choosing higher production or emission levels (Böhringer and Lange, 2003). An example of this could be the initial allocation based on past emissions or on standards from a previous command-and-control system. Moreover, grandfathering schemes which take historical emissions as a basis for allocation within continuous planning cannot completely circumvent the problem of distortions, as any upcoming firms’ decisions will determine the emission levels that will be historical for its allocation in subsequent periods (Böhringer and Lange, 2003). As such, companies have a good incentive to pollute as much as possible in their initial phases when they are still not under the net and guarantee higher allocations for future.

Lack of Penalties

There are no penalties for countries which fail to honour their commitments in Kyoto, which presents the second major drawback of the scheme. The use of a simple Game Theory matrix for such a situation would show that countries will find it to their advantage to defect from the agreement unilaterally and not to decrease their emission levels. This would be the best strategy for that country and some countries, or industries in countries might adopt such a strategy. The absence of penalties in the form of fines or restrictions can give rise to increasing free riding on part of some of the players.

Non Participation of United States

United States is one of the biggest polluters of the world and non ratification of Kyoto by it is a major setback for the whole process. It’s hard to imagine the system having any significant effect on global scale without the participation of the biggest super power of the world, especially when it is one of the major contributors to the world’s environmental woes as well. The arguments presented by US for its non ratification of Kyoto Protocol are: 1) the disparity in reduction targets between developed countries and developing countries such as Brazil, India, and China: 2) limits on use of sinks as emission reduction mechanisms: and 3) non ratification of any treaty which would result in serious harm to the economy of the United States.

The disparity in the reduction targets for developing and developed countries can not be done with as it doesn’t make sense to ask countries like China and India, who are still in developing phases to match the targets for US or most of the North countries. The developed countries made progress through open and unlimited ‘License to Pollute’ measures for a long time, and now using environment as an excuse to curb development of others doesn’t seem a fair argument. The reasons for limits on use of sinks for target reductions, as portrayed by the American side, are the desire of European countries to gain an economic edge over the United States and to paint Americans as greedy, sloppy villains, which I might add, is quite plausible. It is further argued that without sinks and trading, the United States could meet the Kyoto targets only by sharply increasing the price of fossil fuels, which would completely sink its economy.

Lack of monitoring in post Clean Development Mechanism phases

CDM is another mechanism by which industrial countries can reduce their targets by investing in developing clean production technologies in developing countries. Although, on paper it looks a good enough scheme, but would it achieve the desired outcomes is yet to be answered. What would be the fate of the industry once the developed country or an industry from a developed country its emission reduction target? Without effective monitoring the CDM measure might start backfiring at later stages, thus offsetting the global reduction targets.

In summary, Kyoto Protocol has been presented as the answer to the global environmental woes, but in reality it is just another question amongst the hundreds of others. It is less than a perfect scheme, and is marred by the economical and political struggles between the elite countries of the world. The amount of energy wasted and the amount of carbon generated through (travelling to conference destination) the rounds and rounds of table talks does little more than giving an idea of a circus being created to entertain the elite few and terrify the majority others.

References

Böhringer, C. and Lange, A. (2003). On the Design of Optimal Grandfathering Schemes for Emission Allowances. ZEW Discussion Paper No. 03-08. Available at SSRN: http://ssrn.com/abstract=412463 or DOI:  10.2139/ssrn.412463

Glassman, J. K. (2001). Forget Kyoto. American Enterprise Institute for Public Policy Research, Columbia International Affairs Online.