"Risks Surrounding the Kyoto Protocol"

Speech to Royal Institute of International Affairs Conference
"Implementing the Kyoto Protocol"
14-15 June 1999, London

Hon Simon Upton
Minister for the Environment
Associate Minister of Foreign Affairs and Trade
New Zealand

Introduction

This is a very long way to come to deliver a single speech. But I find the subject matter irresistible, having lived with it as an environment minister for almost a decade. This is the most difficult issue on the multilateral negotiating agenda and it can only benefit from the searching scrutiny that a conference like this can provide. Having endured the sterile negotiating environment of every Conference of the Parties to the FCCC since Berlin, I am not surprised that we need to provide alternative forums in which to address the issues frankly and directly. That, at any rate, is what I intend to do.

I would like, today, to talk about three types of risk that surround the Kyoto Protocol. The first concerns the debate that continues over the scientific basis for the Framework Convention and Protocol; the second concerns the potential for economic dislocation, particularly to Annex I countries, caused either by the scale or the terms of any attempt to undermine the agreement contained in the Protocol; the third involves the political tensions set up by the somewhat arbitrary basis on which nations are assessed to have common but differentiated responsibilities.

Scientific Risks to the Protocol Process

I won't spend too long on the first of these risks - the on-going debate about whether there is enough evidence of a risk to the world's climate from anthropogenic sources to justify continued negotiations. I'm not a scientist so I can add nothing to the sum of human wisdom on the magnitude of the risk. But as a politician I can't ignore the on-going under-current of scepticism that continues to niggle away at non-experts who would like a good deal more certainty before telling their constituencies - be they business or political - why action is necessary.

Talk of scepticism may surprise a European audience. But outside of the EU, and particularly in America, there are staunch critics of the view that we know enough to justify immediate action. It would be easy to write off such sceptics as being in the pay of those whose commercial interests could be placed at risk if fossil fuels become much less attractive. And there are, assuredly, many people busily mining the uncertainties that beset climate science, and who do so from a position of rank self-interest.

The truth is, however, that there is more scientific uncertainty at the heart of the FCCC than any other major environmental treaty presently occupying the time of negotiators. We don't know how big the risks are, how long the time frame is in which they may be unfolding or even what the 'natural' background trends are against which we should be able to assess them. It has been remarked on more than one occasion that if we had known in 1992 how little we would still know about the natural carbon cycle today, we might never have signed the Convention in the first place.

Uncertainty has never been a very good basis for a rallying cry. Perhaps that is why activists on both sides of this debate seem determined to replace the cautious, sometimes equivocal and always provisional conclusions of research, with the sort of certainty that can only be summoned by those who, for reasons best known to themselves, have pre-determined the issue and don't want to be confused by any arguments to the contrary.

On the one hand, those who wish to see immediate and serious cuts in emissions (perhaps from some innate distaste for consumer society) point to changes in natural patterns, such as the recent severe El Nino and La Nina cycles or the localised break-up of ice shelves, and claim them as evidence for human-induced climate change and imminent catastrophe if action is delayed. On the other hand, we observe those with much to lose from any reduction in emissions skilfully interpreting any uncertainties as evidence fatal to the case for early or indeed any action. This camp frequently seizes triumphantly on any skerrick of evidence that suggests 'natural', non-anthropogenic warming trends may be discernible.

The catastrophists fail to explain that our baselines are simply too short to make such definitive claims: serious as the impacts of such cycles can be, extreme events cannot be assumed to represent changes in climate patterns. The sceptics ignore the fact that if global temperatures are rising for reasons that have nothing to do with burning fossil fuel, our room for manoeuvre may be even more limited than we think.

In my view, the problem with this hectic search for 'evidence' is that it proceeds from a faulty premise: that this is a debate about proving or disproving the case for reduced emissions on the basis of current knowledge. The truth is, that if we were truly certain one way or the other, the world would either have taken fairly decisive steps to curb emissions already (as it did with ozone depleting substances) or it would have consigned the issue to the waste paper basket. The fact that we have done neither - for the best part of a decade now - is evidence that we continue to wrestle with a risk whose dimensions we cannot be sure of.

About the only thing we can be sure of is the likelihood that the 'science' will remain incomplete on this issue for some considerable time to come. And while by 2008 we should know a great deal more than we do today, we will still not know for sure the extent of the problem and its full implications.

We are faced with a classic case of decision-making under conditions of uncertainty - and on a truly global scale - which applies to very few other environmental concerns. Uncertainty normally occasions prudence based on a reasonable assessment of the risks. There is no unique calculus to be applied but we shouldn't be afraid to acknowledge the uncertainties that exist. To do so risks seriously harming the relationship between those whose task it is to judge scientific uncertainties and those responsible for managing the downsides of those uncertainties.

There are those who cite with approval scientific opinion selected on the basis that it supports pre-existing prejudices (such as a dislike for the UN) or that it aligns with their commercial interests. There are scientists who move from analysis to advocacy without being clear about the quite different sorts of judgments that are involved. Either way the quality of the debate is devalued. Politicians, scientists and interest groups can devalue their respective currencies very swiftly if they misappropriate one another's very different approaches to the definition and management of risk. The misuse of science by all sides in the climate change debate is, from a public policy perspective, one of the biggest risks we face.

In my view, both extremes - alarmist and head-in-the-sand positions - must be rejected. In the face of the magnitude of the potential impacts from climate change it is simply good risk management to face up to the range of risks - and it is a wide range - described by those who have sought to understand what increasing concentrations of greenhouse gases in the atmosphere may hold in store for us. The fundamental question therefore is not whether or not to act, but more the nature, pace and timing of our response.

For my part, a gentle start - 5% below 1990 emission levels by 2010 (on average) with a decade's warning before commitments actually bite - is not at odds with the current state of knowledge as long as we accept that we may have to move much faster, and more comprehensively, a few years from now.

Economic risks to the Protocol process

I would like to turn to some of the key economic risks to the international process. Within Annex I, the root concern would seem to be one of competitiveness, although this is not always clearly articulated in the current debates surrounding the key decisions required to make the Protocol operational. Globally, the concerns are over leakage and the nature and timing of broader developing country participation.

The Kyoto Protocol achieved the crucial step of allocating targets for Annex I Parties, for an initial commitment period that will commence in 2008. Now that targets have been set for Annex B Parties, the environmental debate has, for the time being, been suspended. It has been replaced by vigorous debate that has more to do with the economic implications of implementing the emission commitments set out in the Protocol. It is somewhat puzzling, however, that people continue to be overly concerned about the economic impact and distributional implications of implementing the Protocol.

At the intra-economy level, short-run sectoral adjustment costs inevitably loom much larger than the overall impact on output. At the inter-economy level, most international modelling shows that the impacts are not large at all - for most countries they involve slight reductions in the rate of growth in GDP amounting to around 1% or less in 10 years' time. In light of these limited magnitudes, the concern with equity of burdens is puzzling. I suspect they turn on the expectation that costs borne now are harbingers of costs to be borne in the future, that we are looking at the thin end of the wedge.

Some of these concerns don't appear to be fully justified. As far as the future equity of burden sharing goes, there is scope for adjustment in future should burdens prove unsustainable. That is, when allocations for future commitment periods are being negotiated, there will be another opportunity to come back to distributional questions.. Second, it is clear that the expected economic impacts (on a particular sector, for example) depend significantly on the degree to which the flexibility mechanisms in the Protocol are implemented, to reduce the costs of meeting current, and future, targets. Moreover, the history of technological innovation suggests that when we do in fact face clear signals for change, people do adapt in surprisingly clever ways, reducing economic impacts substantially.

For some Parties, competitiveness concerns appear to be paramount and lie behind most of the current areas of debate surrounding the mechanisms. Within Annex I, concern over possible losses in domestic competitiveness for key sectors or industries is distorting the choice-of-instrument debate and has been a factor behind proposals for restrictions on the operation of the Kyoto mechanisms, as an indirect form of protection for domestic industry. I would question the effectiveness or desirability of such protection of domestic industry.

There are significant problems with trying to protect or exempt domestic industry from facing the costs of adjusting to less emission-intensive forms of production. As with any form of protection, it means that the adjustments don't necessarily occur where they would be most cost-effective, so greater costs are imposed overall. It also means that other sectors of the economy bear more of the burden. Moreover, in a world where developed countries are moving to reduce trade barriers, it is disappointing to see arguments for the introduction of what are in effect border quotas on assigned amount trading.

Imposing arbitrary restrictions on the mechanisms, both in terms of limitations on buying and selling and attempts to limit trading in so-called 'hot air', would raise some difficult questions. For example:
· What if the EU had been similarly restricted with its internal burden sharing arrangements for internal member state targets? After all, burden sharing arrangements make political sense within the EU, just as emission trading makes economic sense within a wider Annex I context. In each case, they reduce the overall burden by sharing it more sensibly. Note that our preliminary analysis reveals that if the same restrictive limits which the EU proposes to apply to inter-country trading were also applied within the EU, we would find that three Member States would exceed the limit on 'selling', and six Member States would exceed the limit on 'buying' assigned amount.
· What if the transfer of East German hot air to Germany as a whole (and hence the EU) had been restricted? I am suggesting that a country comes by 'hot air' only with the pain of difficult economic adjustment - and this ought to be recognised, not only in the case of internal hot air, but also at the country level.
· And will the EU bubble be extended to include new EIT members? As far as I am aware, most of the candidates for integration into the EU would have some significant low-cost opportunities for reducing emissions.

It seems to me we need to use two principles to guide us in our thinking here:

First, we need to seek solutions within as wide a context as people wish. We need to accommodate both local bubbles and bigger bubbles. The EU's burden sharing bubble makes sense for the EU - a group among whose members there are already understandings and political mechanisms that allow for 'respreading' through negotiation. Within the wider Annex I bubble, negotiation is more difficult and trading between nations makes more sense. That is, the absence of political integration means that trading within an economic bubble can play an equivalent role to the EU's burden sharing. Moreover, we should recall that Kyoto was quite explicit in accommodating trading solutions. Without the flexibility to redistribute the burden internally, the EU might not have agreed to a standard 8% reduction. Similarly, other countries made good-faith commitments at Kyoto on the basis that they could meet them using the Kyoto mechanisms without arbitrary restriction.

Second, we need to remember that we are dealing with an ongoing process. Kyoto focused on the first commitment period, but there will be more to come. If hot air means that first round cuts are not stringent enough, in light of the risks about which the scientists can update us, we will have to look again at targets for second and subsequent commitment periods.

In my view, we should see the setting up of flexible mechanisms, without substantive restrictions, as critical for allowing deeper targets in the future. With a simple coherent trading framework we can go on to more stringent targets, should the environmental risks dictate this. Without such a framework, costs will be higher, negotiations will be more difficult and resistance and scepticism greater. We need to make progress on a logical, efficient and sustainable framework sooner rather than later.

European suspicion of trading baffles me, particularly when set alongside the relaxed attitude taken towards the Clean Development Mechanism (CDM). A comparison of the two mechanisms will explain my wonderment. The key point in favour of trading is that it will not increase the overall cap on Annex I emissions. It will not 'inflate the overall bubble.' What one country buys in the way of assigned amount will be what another country sells. Trading is a mechanism for redistributing the emissions limitation burden - it is not a mechanism for raising the cap.

This is potentially in contrast to the CDM. Unless we are careful with the CDM, there is a potential for it to become a mechanism for lifting the cap on Annex I emissions. This could happen if the CDM allows business-as-usual baselines to be overstated and hence allows the overestimation of emission reductions from CDM projects. To the extent that those emission reductions are passed back to Annex I countries, the overall cap on Annex I would, in effect, increase. This would represent a weakening in the stringency of the Annex I commitment for the first commitment period - a weakening I would altogether oppose.

Some might argue that the CDM mitigates concerns over carbon leakage. This has some truth. Concern over carbon leakage to non-Annex I countries (as a result of their non-participation) is widespread, as I have noted earlier. I am not alone in believing, however, that the leakage problem can be overstated. Production location decisions are driven by a host of factors, not just fossil fuel prices. Although some leakage may occur in the short term, it makes sense for Annex I Parties to aim to reduce as quickly as possible the carbon intensiveness of new investment in developing countries. The Clean Development Mechanism can help in this. The CDM provides a useful vehicle to assist developing countries move more rapidly toward a decarbonised development path. The full benefits of this would accrue to those countries which assume greater responsibility for their emissions. Nevertheless, our support for the CDM should be conditional on it not becoming a means for lifting the effective cap on Annex I country emissions.

The debate I have described over emissions trading is probably a familiar one. What, you may ask, are the risks it poses for post-Kyoto progress. The answer, very simply, is that without substantial recourse to trading, a number of very significant countries will simply refuse to ratify. They will find it very difficult to explain to their businesses that they should seek to implement the Protocol in a more costly way than is necessary. European businesses, it seems, are unique in giving their political leaders a free hand to enter into treaties without close regard for the costs being imposed. It may be that Europe is in the enviable position of having become so economically advanced that such considerations are trivial. But for those of us more exposed to the vagaries of commodity prices, this is not a matter we can lightly dismiss.

To sum up, I think Annex I Parties need to consider their positions and ask themselves whether there is more heat than light being generated by the persistent refusal of some to relinquish the notion of restrictions on trading. I would ask for consistency in thinking - in the application of principles within states and between states. And I would ask that we take a rounded view of the mechanisms and ask ourselves how can they be structured to deliver the overriding environmental objective at least cost and in a durable manner.

Political risks to the Protocol process

Turning to the negotiating risks that confront the Framework Convention, any objective observer would have to be very wary about the prospects for entry into force of the Kyoto Protocol. The international outlook is very complicated and there are all sorts of centrifugal forces at work - forces that seem less interested in sensible compromises than in having their own way.

There was nothing ideal about the negotiating process leading up to Kyoto. A very large group of countries acted as if they had little to lose - they appeared to down-play their own interests in protecting the stability of the climate system - while a much smaller if richer group of countries had much to say about a great deal being at stake environmentally, but acted as though there were rather more at stake economically. There was no level playing field established for this process.

Indeed, the tensions exhibited at Kyoto - and subsequently in Buenos Aires - go back to roots of the Framework Convention itself, with its provision for "common but differentiated responsibilities". That in itself was not problematic. The Montreal Protocol, for example, had provided for just such a division of labour. But there, the timetable of engagement for all parties had been hammered out up front. Here, the Prisoner's Dilemma was left unresolved - as it is to this day. No amount of commitment by developed countries will guarantee engagement by others.

Various countries put forward versions of differentiated responsibilities that favoured them most, but were unable to sell their version to others. New Zealand opted for the conditions necessary to make a start in these less than ideal circumstances. We argued for uniform targets and the establishment of an international price for a tonne of CO2-equivalent through a system of international emissions trading. This would have ensured that everyone faced the same upper price limit per tonne of carbon-equivalent abated.

What we got at Kyoto was no closer to the ideal. Far from being uniform, targets ranged from -8 to +10%. Countries ended up with targets that bore no clear relationship one to another. Generally speaking, those countries that argued most strenuously for differentiation demanded and accepted softer targets. The EU, to its credit, took on the most demanding target. But in doing so, it could rely on its bubble arrangement that conveniently enabled it to preside over an even wider range of targets that, along the way, banked a good measure of hot air from East Germany. Overall, the aggregate target of 5.2% reduction from 1990 levels for Annex I was the maximum achievable in the fraught atmosphere of Kyoto.

While it is clear that the number one priority of all parties to the negotiations should be to ensure that all reasonable conditions are met for the entry into force of the Protocol well in advance of the first commitment period, the reality is that the Kyoto agreement is still very fragile. It urgently needs the benefit of some confidence-building measures.

Confidence, unfortunately, is in short supply. If anything, the prospects for entry into force of the Protocol have become even more complicated and distant. I will characterise the contrary trends as follows. The centrifugal forces I referred to a moment ago might be characterised under the following headings:

1. Relitigating targets: This is what I read as the essence of the efforts being made to put an artificial ceiling on the use of hot air and mechanisms like trading. I have already talked about these. The effect of constraints would be to raise costs in various ways, some of them reflecting nothing more than the clumsiness of attempts to frame such constraints.

2. Setting unreasonable preconditions: How can it be fair or reasonable to expect developing countries to act on the same basis or on the same timescales as developed countries? My understanding is that some significant developing countries are already making considerable efforts. That demands for simultaneous action should be most strongly voiced by some in the country that is the single largest generator of greenhouse gases suggests that a sense of proportion and responsibility is lacking in some quarters.

3. Blocking out the future: By the same token, some countries seem to define consensus as a refusal to discuss controversial subjects, no matter how pertinent they might be. If the Kyoto Protocol targets represent a first step, how are we to map out the subsequent essential steps to engage all countries if all discussion of the matter is blocked? The current impasse reflects the tyranny of the majority, and we must move beyond it.

4. Who wants the Protocol anyway? Let us not forget that there are countries for whom international action to reduce greenhouse gases is the lowest of priorities, or at odds with their interests. Unfortunately they number amongst the most active countries in the climate change negotiations, with an influence that has never ceased to amaze me.

These centrifugal forces are acting on a difficult negotiating environment. Negotiations are divided amongst the three traditional groups: the G77 and China; the EU and other Europeans; and the other OECD countries plus some economies in transition, united under the title of the Umbrella Group. Because of the complexities of the negotiations, each of those groups tends to regard it as an achievement if they succeed in coordinating an internal position. The demands of real negotiation amongst the different groups- in terms of increased understanding and compromise - are much more difficult to meet.

I have no ready solutions to these problems. The answer clearly lies in increasing the scope for real dialogue and understanding. This may in turn imply a rethink about the way the UNFCCC goes about its business. There must also be a greater role for honest brokers. I have always seen a promising role for countries of the AOSIS group in this regard. They come to the negotiations with clean hands being neither in the past nor the present a significant contributor to the problem nor a likely future contributor (Singapore excepted). They have a clear interest in early, effective action given their physical vulnerability. At the moment, however, AOSIS is submerged in a much larger group whose interests could, in some cases, scarcely be more divergent. The day AOSIS clearly distinguishes itself from groupings like the OPEC countries, it will become a much more compelling voice in the negotiations.

The current international muddle, reflected also in the overloaded UNFCCC agenda, is undermining the credibility of action on climate change. The greater the uncertainty, the more difficult it is to persuade domestic constituencies that early action on emissions is justified. It is vital that we get the agenda back on track. The priority must be to promote early action on climate change. That means dealing expeditiously with the follow-up work on the Kyoto Protocol, and clearing the way for the essential ratifications - which are Annex I ratifications - and entry into force.

It does seem to me that it is absolutely vital in the first instance that the countries that are accepting binding targets should sing from the same song-sheet. Bearing in mind the need for action to be taken in due course by developing economies, the developed economies must first be able to agree on ways of taking action that impact least on economic growth and development. This, from the standpoint of developing countries, must be pretty important. At the moment the major developed economies are talking past each other. How can these countries hope to convince others that action on climate change need not mean economic loss if we can't convince each other, or follow a path that will demonstrably avoid such losses?

It is of course very important, and I stress this, that the developed economies take the lead on action on climate change in accordance with the principle of common but differentiated responsibilities. But the demonstration effect will not be enough in itself. There must also be an honest recognition on the part of those countries not included in the first binding steps under the Kyoto Protocol, that they must then begin to take action. Again, I stress the need for the developed economies to take a lead. But let us not overplay the importance or objectivity of the division made between developed and developing countries in this regard. There are a number of countries included in Annex B of the Kyoto Protocol which are economically more vulnerable than a number of so-called developing countries.

The Pew Center on Global Climate Change published, just in time for COP4 in Buenos Aires, a very interesting analysis of various aspects of global equity in the area of responsibility for action on climate change. It considered a number of criteria, including responsibility for emissions, standards of living, and opportunities to reduce emissions. It came up with a revised list which split countries into three categories: those that must act now by taking on legally binding reductions; those that should act now, but in different ways; and finally, a group of countries that could take some action now, but should not be required to do so.

Not surprisingly, the first group, those that must act now because of their high level of responsibility and capacity for action, includes most of the major developed economies. However, there were also a number of countries not included in Annex I or Annex B. They included the likes of: Argentina, Chile, Israel, South Korea, Kuwait, Malaysia, Mexico, Saudi Arabia, Singapore, Thailand, the UAE and Venezuela.

The second group covered both developed and developing countries, and included most of the economies in transition currently listed in Annex I and Annex B. The third and largest group was made up entirely of developing countries. I mention this not to try to justify relitigating the Kyoto targets - we have to start somewhere, and the Kyoto agreement is the only starting point we have. Rather it is to indicate that there are more than adequate grounds for extending action thereafter, so much so that a failure to do so could seriously affect the willingness of many of those in Annex I or Annex B to take further action.

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