upton-on-line

26^th July 2001

In this edition

Upton-on-line opines on the significance of the Kyoto Protocol in its latest incarnation and muses on whether Italian entrepreneurs in San Gimigniano would survive the Resource Management Act.

The coyotes go hungry

Very few people thought the resumed negotiations on the Kyoto Protocol in Bonn last week would yield anything. After all, it has been clear for a very long time that this was an international treaty in serious trouble. Political and journalistic coyotes began to circle in the hopes of a kill. But Kyoto seems to be a tougher beast than many thought. The animal that came out of the Bonn conference has certainly lost some condition; and it has been denied access to a quarter of the entire ranch with America’s self-imposed non-participation. But it is still alive and likely to cast a very long – if diffuse – shadow over the future.

There will be much poring over the entrails of the latest negotiations and upton-on-line claims no special expertise. But as a seasoned survivor of every single COP (Conference of the Parties) except the last one, he feels entitled to lay out a few observations.

"The most comprehensive and difficult agreement in world history"?

Was it, as New Zealand’s Pete Hodgson proclaimed? The relief at keeping the protocol alive generated more than the normal amount of ministerial light-headedness that flows from negotiating around the clock. So it would be easy to dismiss such rhetoric as over-blown. It probably is – but not much.

In truth, there is no parallel in diplomatic history for what was attempted at Kyoto. It has been said many times before but it bears repeating: never before has such a complicated Treaty been attempted. It’s worth putting it in context. The first ‘modern’ multi-national negotiation occurred less than 200 years (or 6 – 7 generations) ago. That was the Congress of Vienna in 1815 at which an attempt was made to settle the borders of the European powers after the traumas of the Napoleonic Wars. It involved a narrow range of issues between states with a common historical and cultural heritage. A couple of world wars and innumerable lower level blood baths later (most recently in Kosovo) one could argue that, the successes of European integration notwithstanding, progress remains provisional.

Or take another negotiation of more recent origin: the establishment of the World Trade Organisation. It was supposed to be established after the Second World War at the time of the other Bretton Woods Institutions. But it took nearly half a century before it was finally set up at the conclusion of the Uruguay Round of trade negotiations which itself ran on for eleven years. Notwithstanding the significance of such an achievement, it focused on a very precise and well-understood issue: creating a rule-based framework for dealing with trade disputes in the context of a reduction in trade barriers that – formally at least – made every signatory better off.

Or to take a third example, consider the Montreal Protocol on Ozone Depleting Substances. Here for the first time the harm to be avoided was global and negotiating success dependent on every country signing up. But the compounds affected were small in number, of insignificant economic importance and easily replaced with alternatives. Even so, it was a hard won treaty that is still – 12 years later – being phased in developing countries.

Treble up

Compared with these treaties, the Kyoto Protocol is the negotiating equivalent of demanding that the whole table treble its stakes. It sought, in one hit, to limit emissions of not just the most common gas from the most ubiquitous energy source but five other gases with potentially enormous economic consequences and do so on the basis that only some countries should have to impose these costs (without a guarantee that others would do so) and that even then the first round of limitations was just a pre-dinner appetizer compared with what future rounds would require. And that’s without mentioning all sorts of complex extras like trying to count involving soil carbon and carbon locked up in trees, or negotiating a brand new legal system to deal with non-compliance by countries that can’t even agree on trade in basic agricultural products.

Was keeping it complex, stupid?

While Kyoto’s most recent problems might be sheeted home to a couple of thousand votes in Florida last November, it’s not as though negotiations had been proceeding smoothly to a tidy conclusion when COP 6 broke up without agreement in the Hague. The reality is that countries had been trying to broker compromise agreements across a bewildering array of fronts including such esoteric matters as how (and whether) to count changes in the amount of carbon stored in soil as a result of changes in land management practices. Add in forest sinks, how you estimate methane emissions from ruminant animals and scores of other technical issues (let alone political ones about burden-sharing and inventions like the ‘Clean Development Mechanism’) and you have a veritable jungle of complexity.

Which has led those seeking a nice tidy verdict to proclaim that Kyoto’s flaw was that it all got too complex. They’re right, but it’s hard to see how it could have been otherwise. This wasn’t a treaty that was trying to replace the coolant in freezers and air-conditioning units. It was a treaty that sought to change the entire basis on which modern living standards were sustained.

The ‘simple’ approach would have been to focus solely on fossil carbon and limit CO2 emissions from the use thereof. But if the concern is human-induced climate change, why would you leave out other drivers (like methane). And if you’re going to include methane from industrial emissions, why not from agriculture? And if we’re going to get into agriculture, why not count forest sinks as a counter-balance?

And even if you did stick to solely to carbon, how do you get round the fact that, in a global economy, one country’s emissions are part of another country’s consumption? Or the fact that if emissions are limited in one country and not in another, there will be a perfectly rational tendency to locate emissions-intensive industries in the countries without restrictions?

The attempt to draw lines around a part of the issue simply sets up new problems. Upton-on-line is not convinced that a simplified treaty would have been any less arbitrary or any less difficult to settle. The complexity introduced by multiple sources and sinks was a perfectly sensible attempt to reduce the costs of what is an incredibly pervasive and potentially costly problem.

A (sort of a) win for flexibility

Faced with complexity, the key debate since the Kyoto Protocol was first drafted has been the extent to which flexible mechanisms could be used to confront it. The way in which "flexible mechanisms" were talked about invested them with an almost illicit aura: that anything other than swingeing, self-imposed emissions emasculation behind national borders was morally suspect.

Demands that emissions trading be treated with the utmost suspicion with strict ceilings be-devilled the negotiations for years. Some parties saw bureaucratically co-ordinated policies and regulations as the best way to cope with the complexity of the very different circumstances in which countries found themselves on day one.

The problem wasn’t one of complexity – it was political. The contemporary world copes effortlessly with complexity in many fields. That is the essence of a market economy. No-one is in possession of central knowledge about its operation or what course it will take. But that doesn’t make it inoperable. The provision of clear and enforceable operating rules means that the dispersed knowledge of million of players communicated through prices leaves people free to make the trade-offs that make the best sense to them.

Up until now, there was believed to be unlimited atmospheric ‘space’ for CO2 (and other) emissions. Now there is good evidence to suggest that there are limits if significant and costly climatic disturbance is to be avoided. So a way had to be found to signal that ‘scarcity’ of atmospheric space to those who wanted to use it. And therein lay what, for upton-on-line was always the impeccable case for creating a market in that scarce ‘space’ and allowing individuals to trade access to it.

What was needed in the first place was a price for carbon emissions (and other gases) that would signal their scarcity. It’s not the reductions on day one that matter – or even in the first five years. It’s the signal that is sent to the people who want to emit these gases in ten or even twenty years time. If they can be convinced that the right to emit will incur a cost, they can then think about to how handle that uncertainty – whether by investing in new technologies, buying up the right to emit or just waiting and seeing.

That’s exactly what happens in the energy market today as energy companies review the prices in forward markets for different energy sources. Precisely the same calculations would be made in a CO2 market. And along the way, private investors would start to shift the pattern of their investments to take account of future scarcity.

Creating that market is a tad more complex than title boundaries on cadastral maps. But the thrust of the Bonn agreement is in favour of trading emission permits without artificial limits and that promises to be one of the more significant green lights for finding solutions that harness rather than stymie the entrepreneurial possibilities that will needed if technological ways forward are to be found.

Because if there is a solution to the problem posed by rising greenhouse gas concentrations, it will be a technical one. This is not a message that will be welcomed by those who would radically rebuild society according to a new ethic. But it seems a fair bet based on what we know about human history. Governments are needed to determine the boundaries of the problem and provide the legal framework for its resolution. But the technologies that are needed are beyond the reach of bureaucracies or political edict.

But does any of this make any sense without the United States?

It all depends how you measure success – and there’s a lot more CO2 destined to be emitted before we’ll know for certain. The biggest impact of the Bonn agreement is likely to be diplomatic. The USA could reasonably have expected that it would not be the only non-signatory. There were plenty of strains within the various groupings of nations that could have seen many more defectors or simply no agreement at all. The fact that the USA is for the time being isolated will certainly be a source of pressure on US policy-making – but not overwhelmingly so. The USA has always been prepared to stand aside from treaties if it has not deemed them to be in the national interest. It does so from a position of unique international strength. There is as much face-saving on the part of European and other countries as there is loss of face on America’s part.

The environmental consequences of the Bonn agreement are much less clear. It could go either way. On the one hand, it could be argued that all the agreement will do is see a redistribution of developed world emissions towards the USA and away from places like Europe as the relative cost of emission-intensive industries rises there. This was always going to be a problem between developed and developing countries. Having America under no more pressure to reduce emission than, say, China, would simply see emissions intensive industries tend to stay there or even shift there.

On the other hand, it could be that enough developed country ratifications will lead companies to bring forward investments in new energy-saving technologies with the result that some dramatic technology-led change in the future trajectory of emissions results. Certainly, many European governments are hoping that there will be a "first-mover" technological advantage in early action. And, of course, it is not impossible that US companies may take pre-emptive action on the off-chance that their own government may one day limit emissions.

The really interesting play to watch will be the way European countries engage players like Russia who have, potentially, a lot of ‘hot air’ to sell. In a clause to the Bonn agreement that has not been closely commented upon, countries that seek to sell parts of their assigned quotas must keep a reserve equivalent to 90% of their total. In other words, they can only trade up to 10% of their available parcel of atmospheric space – a cap on trading if ever there was. Unless that is, there are plans to trade outside the Protocol. Upton-on-line was never much of an international lawyer but the published text is scarcely a model of blinding clarity. Who knows what may happen in practice…

None of this adds up to the likelihood of any dramatic changes in the outlook for emissions. But neither does it add up to the sort of dramatic economic dislocation that some have worried about. The extra flexibility that the parties gave themselves on sinks and land use change will ensure that.

So where to next?

Aside from the (not inconsiderable) amount of detail still to be negotiated, the first hurdle is actually bringing the Protocol into force. That’s not guaranteed – 55% of countries representing 55% of emissions are needed. There’s no guarantee of that. Beyond that, the big issue is where this treaty goes to after the first period of restricted emissions (2008 – 2012) has run its course. Even supposing ratification by all except the US (an unlikely outcome), and even supposing perfect compliance, it is not at all clear how further reductions can be negotiated. With no sign that developing countries are yet prepared to talk about a formula for future limitations, and the biggest emitter in the world not prepared to join in, one would have to say that the chances of a further round of reductions looks remote.

It will depend, as always, neither on the number of international conferences that are held – nor on the declarations made by politicians, NGOs and others. Rather, it will depend – as it always has - on whether it is technically and economically feasible to do so. That was the case with the Montreal Protocol where affordable solutions were to hand. The $640 billion question (or some such astronomical number) is whether Bonn’s modest, partial sign-up is enough to trigger a fresh wave of technical innovation – or even, controversially, whether those innovations were going to happen any way.

Living in a World Heritage Site

A brief thought: upton-on-line recently experienced the joys of homes-stays, Italian-style – agri-turismo as the natives call it. It was in the middle of a nature reserve not far from San Gimigniano in Tuscany. It was deeply rural – metal roads and a power supply that went off in the middle of a thunderstorm that bettered anything in A Room With A View.

But 10 minutes drive away, San Gimigniano welcomed its daily haul of Dutch and American Audi-driving tourists – and announced itself, outside the 14^th century walls, as a UNESCO-inscribed World Heritage Site. The town is perfectly intact (minus all the towers that got knocked down between the fifteenth and the nineteenth century when there was no Resource Management Act to ban wars, civil conflict etc). But every nook and cranny is commercialised (in passable taste). So the frozen film set is providing good incomes for all and (if you can find a park) a piece of illusory Tuscan atmosphere for the hordes.

The thought that struck upton-on-line was: would the RMA process ever allow a World Heritage Site to co-exist with this sort of intensity? Somehow, the Italians accept that heritage and commercial exploitation have a symbiotic relationship. Of course NZ is different and the sorts of values being protected are different. But it remains an open question whether the Act’s injunctions about protecting the coastline and landscape will survive unless they can accommodate some pretty grassroots-based support for making those attributes pay so that people can afford, literally, to eat the view.