2 From Rio to âBeyond Kyotoâ: Synopsis of international climate policies
This chapter will give an overview of the main international policy developments from the early 1990s onwards. The aim of this synopsis is not to provide an extensive discussion of all initiatives over the years, but merely to indicate and briefly explain the most relevant regulatory developments around the world. This covers international, regional and national climate policies. The chapter describes the basic climate change policy events, giving particular attention to emissions trading, to understand the context in which business responses have evolved. Chapter 3 will subsequently focus on the voluntary co-operative initiatives taken by companies, including voluntary agreements and multi-stakeholder partnerships on climate change, that have evolved against the background of these developments.
Over the years, there has been considerable attention given to the types of environmental policy instruments available as well as their pros and cons. Generally speaking, interest has moved away from the traditional command-and-control approach, in which the government sets legally binding standards for emissions limits or the specific technology to be used, to market-based instruments â sometimes called second-wave policies, since they emerged later, in the 1980s. In climate change policies, which started in the 1990s, command-and-control has been much less important than market-based instruments.
Scholars have emphasised that market-based instruments are more cost-effective than traditional regulation to achieve the same level of effectiveness, because they rely on the efficiency of the market mechanism; they also grant companies more flexibility (cf. Hahn and Stavins, 1992; Tietenberg, 1990). In particular, an emissions trading system creates incentives to reduce emissions with technologies that are most appropriate and beneficial to companies. However, the functioning and thus the effectiveness of emissions trading depend on a number of factors related to the design of such schemes and in part the political involvement of companies. Companies have obviously tried to influence the emerging carbon market to their benefit. They have lobbied directly and through their national governments to achieve the best outcome â individually and collectively through business and industry-specific associations (for more details see Chapter 6).
In these complex lobbying processes, some companies have been better placed than others; in particular the large ones are usually more influential in view of their impact on employment and economic growth. Moreover, closely related to this, their managers have better access to politicians and know how to use their position. Companies have also helped shape the direction and contents of various policy instruments by formulating proposals and by coming up with their own individual or collective voluntary initiatives. To these, we will turn in Chapters 3 and 4. First this chapter will summarise the main policy developments over the years, as well as introducing the components of the Kyoto market mechanisms, most notably emissions trading, and the Clean Development Mechanism (CDM).
2.1 POLICY DEVELOPMENTS ON CLIMATE CHANGE
International policy on climate change started with the adoption of the United Nations Framework Convention on Climate Change (UNFCCC) at the United Nations Conference on Environment and Development in Rio de Janeiro in 1992. This agreement marked the beginning of a long process of international policy developments on climate change, as shown in Table 2.1. UNFCCC was a broad plan for action, but did not set clear targets for the reduction of greenhouse gas emissions other than the objective for a stabilisation in 2000 at the 1990 level. While there were international discussions about the issue in subsequent years, it was not until 1997 that countries agreed upon more detailed, differentiated reduction targets under the Kyoto Protocol (Grubb et al, 1999). However, in the years following Kyoto, the negotiations about the exact rules for implementation of the Protocol have been very turbulent. This has created great complexity for multinationals in particular since the specific shape of their home and host country governmentsâ climate policies continues to be uncertain.
Table 2.1 Overview of policy developments on climate change
The negotiations about the implementation of the Kyoto Protocol most obviously took place at the so-called Conference of Parties (COP) meetings. The first COP after Kyoto was held in Buenos Aires in 1998, where parties reaffirmed their commitment to the Protocol. However, in 1999, at the COP in Bonn, some fundamental disagreements between countries emerged. First, the US pushed for the inclusion of, and thus targets for, developing countries, which was opposed by India and China in particular. Second, the EU called for a restriction on the use of emissions trading, offset projects and carbon sinks, whereas the US favoured an approach with maximum flexibility and no limits on the use of these mechanisms. These differences had already been visible in the years leading up to the Kyoto Protocol. The policy measure originally put forward in the EU in these years was some form of carbon tax. However, two proposals (in 1992 and 1995) to implement an EU-wide carbon tax failed due to lack of agreement between the Member States (Christiansen and Wettestad, 2003). By contrast, the US introduced the option of GHG emissions trading in the discussion, because it had good experiences with similar trading schemes for the reduction of sulphur and nitrogen oxides (Grubb et al, 1999). It was the conflict between the US and EU that led to the failure of the climate talks at the sixth COP in The Hague in November 2000. The use of forests and farmlands as carbon sinks formed the central issue on which the negotiations collapsed. In March 2001, hopes that the Kyoto Protocol would enter into force soon were blown when US President Bush decided to reject it altogether, based on the argument that ratification would harm the US economy and its international competitiveness.
In the course of 2001, however, the US government experienced considerable pressure to reconsider its position towards the Kyoto Protocol. As a result, the negative stance was alleviated somewhat and an alternative, âscience-basedâ, climate change plan was presented, which emphasised a technology-based solution to global warming that would not harm competitiveness. One month after the launch of this US proposal, negotiations in Bonn, which aimed to âsaveâ the Kyoto Protocol and move on without the US, resulted in an agreement between the EU, Japan, Russia, Australia, Canada and a large number of developing countries. The EU made concessions to Japan and Russia by allowing unrestricted use of the flexible mechanisms (emissions trading, Clean Development Mechanism and Joint Implementation), and to Canada and Australia by allowing (limited) use of forests and farmlands as carbon sinks. The 2001 Bonn agreement put the US in an isolated position. Shortly afterwards, the European Commission adopted a proposal to start a European Union emissions trading scheme (EU ETS) in 2005 (EC, 2003). Looking back at the negotiations preceding the Bonn agreement, it is remarkable that the EU had become the main advocate of the policy measure they rejected for years: emissions trading (Christiansen and Wettestad, 2003).
At the next COP in Marrakech, the political agreement of Bonn was turned into a legal text that enabled the ratification of the Kyoto Protocol (Den Elzen and De Moor, 2002). Since then most parties, including the EU, Japan and Canada, ratified the Kyoto Protocol, while the US and Australia have not done the same. It was only at the end of 2007, following a change of government, that Australia chose to ratify after all. After long hesitation, Russia eventually ratified in February 2005, thus putting the Protocol into force (Henry and McIntosh Sundstrom, 2007). In spite of this âlandmarkâ, the international climate change arena has continued to exhibit changes, with implications and/or active roles for companies. At least three notable developments should be mentioned.
First, there still exists uncertainty about what will be the future of the Kyoto Protocol after 2012. Discussions about emissions reduction targets (including potentially those for developing countries) after the first commitment period (2008â2012) started in Buenos Aires (2004), but only a weak âcompromiseâ could be found. Since then, several meetings have reaffirmed countriesâ willingness to continue discussions. The COP in Montreal (2005) appeared to lead to a breakthrough, as at least a dialogue was initiated to discuss future action, which proved to be an important signal to business that Kyotoâs flexible mechanisms will continue beyond 2012 (Depledge and Grubb, 2006). However, one year later in Nairobi (2006) not much progress was made (Pew Center, 2006). Only at the COP in Bali in December 2007 did participating countries finally come to an agreement to start negotiating a post-2012 global climate policy framework as a follow-up to the Kyoto Protocol.
Discussions on future action have centred on two issues. First the topic of reduction targets for developing countries has been and will be contentious. It was already raised at international climate talks in New Delhi (2002) when India repeated its refusal to impose targets, based on the argument that industrialised countries have traditionally been the main contributors to global warming and are thus responsible for its solution. A second, closely related issue has been the long-standing unwillingness on the part of the US to agree to legally-binding commitments as long as developing countries have no emissions reduction targets (Depledge and Grubb, 2006). Besides the UN, countries have also started to discuss post-Kyoto climate policy in other political arenas. Most noteworthy has been the 2007 Asia-Pacific Economic Cooperation (APEC) Sydney Declaration on climate change, which set the non-binding target to improve energy efficiency by at least 25 per cent by 2030 and to increase forest cover by 20 million hectares within 13 years. However, due to the fact that this declaration lacks a binding commitment and does not target GHG emissions directly, it has been much criticised as being just a distraction from the UN approach.
A second development is the emergence of technology-oriented agreements, which have been introduced on national and international levels (de Coninck et al, 2007; Philibert, 2005). A technology-oriented agreement is an alternative kind of climate policy compared to the Kyoto Protocolâs binding commitment approach, which is aimed at research and development and/or transfer and deployment of emissions-reducing technologies. An international case in point of a technology-oriented agreement is the Asia-Pacific Partnership on Clean Development and Climate, launched in 2006. In the Asia-Pacific Partnership the US and Australia aim to work together with China, India, Japan, and South Korea on the transfer and deployment of technologies that improve energy efficiency and reduce air pollution and GHG intensities (Asia-Pacific Partnership, 2006). There has been quite some discussion whether this Partnership has been put in place as a substitute for or complement to the Kyoto Protocol (McGee and Taplin, 2006). While the Asian countries involved in the Partnership have argued against the fact that it is a substitute for Kyoto (Tiberghien and Schreurs, 2007), nevertheless at its launch Australia in particular positioned it as such (Crowley, 2007).
With regard to technology-oriented agreements, it has been argued that agreements aimed at knowledge sharing, research, development and demonstration, and technology transfer, although useful in their own regard, cannot form a substitute for a commitment-based approach; only a mandate for deployment of particular technologies could be just as effective environmentally (de Coninck et al, 2007). Technology mandates have been taking shape in many different countries recently. One example is the renewable portfolio standard that many US states have put in place (see section 2.3). However, technology-based climate policies are not limited to the US. The EU has also started to employ this approach, first with the 2001 EU Renewables Directive which set an EU-wide target to use 22 per cent renewables in electricity production by 2010 (EC, 2001) and more recently with the adoption in 2007 of an indicative target to have 20 per cent of the EUâs energy consumption coming from renewables in 2020 (EC, 2007).
A third development has not been a direct change in international climate policy as such, but a string of events occurring over a period of about one year that has considerably increased the saliency of climate change and heightened the urgency of climate policy. The first of these events is the release of Al Goreâs movie An Inconvenient Truth (24 May 2006). The success of this movie has had a huge impact on the public perception of climate change. What further contributed to its impact has been the fact that Al Gore won two Oscars for the movie and, together with the IPCC, received the Nobel Peace Prize in 2007. A second event was the publication of the Stern Review on 30 October 2006. The main merit of the Stern Review was that its lead author â Sir Nicholas Stern â was the World Bankâs former chief-economist with no ties to the environmental movement whatsoever. As a consequence climate change was no longer seen as an issue propagated by environmental activists, but had become an important global issue which could have a huge economic impact. The third in this string of events was the publication of the IPCCâs 4th assessment report in the period from February to May 2007. This assessment report reaffirmed the fact that global temperatures are rising and that it is very likely, with over 90 per cent certainty, that human-induced GHG emissions have caused this to happen.
To summarise, then, since the inception of the 1997 Kyoto Protocol global climate change seems to have become a widely salient issue appealing to voters all over the world (cf. Bonardi and Keim, 2005), especially in more recent years (Brewer, 2006). However, it is also clear that the international policy context on climate change can hardly be characterised as a âlevel playing fieldâ in the post-Kyoto period. It is not only difficult to keep track of the exact details of climate policy on an international level, but also on a national level. Even though many countries have ratified the Kyoto Protocol, it is still not evident in most cases how national governments intend to meet their targets. This means that there is ample room, and perhaps also necessity, for companies to try to influence the direction and contents of climate change measures, at national and international levels. Most concretely, they have done this by helping to shape the emergent market mechanisms included in the Kyoto Protocol, particularly the emissions trading schemes.
2.2 INTERNATIONAL CLIMATE POLICIES
Climate change policies, which started in the 1990s, have mostly been based on market-based instruments instead of the then prevailing command-and-control regulation. The main market-based instrument for climate change is emissions trading through a âcap-and-tradeâ system. It was the Kyoto Protocol that first established emissions trading for the purpose of climate change mitigation. Under the Protocol participating countries are allowed to exchange part of their obligations with another party (Grubb et al 1999). This intergovernmental emissions trading regime, which enables countries to transfer GHG emissions, has led to the creation of domestic systems to trade emissions at a company level. This means that companies need a permit to emit greenhouse gases and governments allocate allowances that determine how much (âthe capâ). If individual countries launch similar ânationalâ emissions trading schemes, in theory the two can be linked and companies can engage in cross-border trade of emissions allowances (Blyth and Bosi, 2004). However, in practice this has not occurred yet, as the implementation of company-level emissions trading schemes has seen great diversity across the world (see Chapter 6 for more details).
In addition to emissions trading, the Kyoto Protocol also established two projected-based instruments: Joint Implementation (JI) and the Clean Development Mechanism (CDM). They allow countries to reduce emissions resulting from cross-border investments (Grubb et al 1999). JI can only be used between two countries that both have an obligation to reduce emissions; they have to agree on how to divide the âreduction creditsâ. In the case of CDM, the receiving country of a cross-border investment is a developing country that does not have an obligation to reduce emissions (yet). The investing country can thus use all obtained credits for compliance with its own commitment. CDM was introduced in the negotiations of the Kyoto Protocol as a compromise towards developing countries. As a consequence, the goal of CDM is not only to enable developed countries to engage in projects in developing countries and thus lower their mitigation costs, but also to use these projects for promoting sustainable development and transferring emissions-reducing technologies to developing countries (Lecocq and Ambrosi, 2007).
Notably, CDM credits from early project activities (from 2000 onwards) could already be used for compliance in the first commitment period (2008â2012). Consequently, CDM became operational already before the Kyoto Protocol came into force (Streck, 2004) and has already become an active market within a few years (Lecocq and Ambrosi, 2007). Both JI and CDM are important mechanisms for business, because investments in such projects are not limited to national governments but allow industry involvement (private investments). To illustrate, although at the outset the World Bank and the Government of the Netherlands were main participants in the CDM market, in 2006 already 80 per cent of all transactions were by private companies (Lecocq and Ambrosi, 2007). CDM is particularly attractive to companies because this mechanism enables companies to deploy existing climate-friendly technologies to developing countries. It is the extra revenue generated by the CDM credits that makes these technology transfers commercially viable in a developing country context, which might not be the case without CDM (Arquit Niederberger and Saner, 2005).
Although the Kyoto Protocol has established emissions trading between countries as well as JI and CDM, it does not require participating countries to also implement a domestic emissions trading scheme applying to companies (Blyth and Bosi, 2004). After ratifying the Protocol, countries have to draw up a plan specifying how they intend to meet their Kyoto target, but a domestic emissions trading scheme is just one of the options. As a consequence, governments across the globe have implemented a wide variety of policy instruments as part of their domestic climate policies, ...
