December 2003
Summary
The Kyoto Protocol is based on a system for reducing greenhouse gas (GHG) emissions called cap-and-trade. Cap-and-trade establishes emissions budgets for all participating countries and allows them to trade parts of their budgets with other participating countries. Under Kyoto rules, trading can occur at the governmental level or between private entities.
Cap-and-trade raises several concerns for developing countries, which may account, in part, for their reluctance to take on future emissions commitments under the Protocol. First, it is difficult for developing countries to predict their business-as-usual emissions trajectory, making it hard to select caps that will not be too strong (leading to non-compliance) or too weak (resulting in “hot air”). Second, cap-and-trade, which is premised on equalizing the cost of emissions in all capped countries, could substantially raise the price of energy in developing countries, making electricity and other energy-intensive goods and services unaffordable for large segments of their populations. Third, cap-and-trade requires capped countries to achieve a high degree of accuracy in their emissions inventories. While important, this could be a daunting challenge for many developing countries.
Another set of problems arises from the process of allocating emissions allowances to countries participating in cap-and-trade. Many proposals initially would give developing countries more emissions allowances than they would need to cover their actual emissions. This would replicate, and possibly magnify, the “hot air” problem that has created potential instability in the first commitment period. It also would likely result in a relaxation of the global target, as the only alternative to relaxing the target would be to reduce allowances allocated to Annex 1 countries, thereby increasing their compliance costs. Moreover, hot air allocations probably would not be acceptable to the United States and could give it a further excuse to remain outside the international regime.
CIEL released a paper which proposes an approach, called “cut-and-trade,” that may better suit the particular needs and circumstances of developing countries. Cut-and-trade utilizes “reduction targets” rather than emissions targets, the fundamental feature of cap-and-trade. A reduction target, either dynamic or fixed, is a commitment to achieve reductions rather than to cap emissions. Cut-and-trade could achieve the same cost-effectiveness as cap-and-trade, while providing greater certainty to developing countries about the level of effort they would need to make to meet their commitments and the cost it would entail. Cut-and-trade would have a more moderate impact on energy prices, which would address the inequitable impact on the poor of conventional, market-based emissions reduction schemes, such as cap-and-trade and carbon taxes. It could be less burdensome to administer, as the level of rigor needed in national emissions inventories would be reduced. Because cut-and-trade would not result in hot air, it would not inflate the global cap or require Annex I countries to adopt more stringent targets. Nor would it provide the United States with an excuse to remain outside the Protocol.