Michael de Laine

US seen reforming the Kyoto Protocol in a ‘palatable’ way, experts say in Swedish report

By Michael de Laine, Copenhagen, 6 March 2009

Because of a constrained timeframe, the most realistic option when negotiating a new international agreement that would replace the Kyoto Protocol by December 2009 is an agreement that does not include legally binding emissions obligations on an international level. The US can be expected to sign an amended, ‘palatable’ version of the Kyoto Protocol, experts say in a new report for the Swedish government.

In the run-up to the COP15 United Nations Climate Change Conference in Copenhagen in December, the Swedish government’s advisory Commission on Sustainable Development asked the company Point Carbon to analyse various possible outcomes of the COP15 negotiations. Point Carbon has long experience of carbon emission markets and has followed the international climate negotiations for many years.

Point Carbon’s report, ‘Four policy scenarios for Copenhagen - An analysis of four possible outcomes of the COP15 negotiations’, was recently handed over to the commission by Point Carbon. The government stressed that Point Carbon is solely responsible for the analysis, proposals and opinions presented in the report.

As expected, Point Carbon said in its report, the international climate change negotiations in Poznan, December 2008, did not produce much in terms of concrete decisions.

“Since Poznan, the political signals from Washington indicate that the USA might play a different role in the upcoming negotiations than what they have been doing the past eight years,” it added.

US President Barack Obama has stated that the new administration would take on a ‘leadership’ role and engage ‘vigorously’ in the international negotiations. Domestically, he aims to return the US emissions to its 1990-level by 2020.

Obama’s observer in Poznan, Senator John Kerry, said he foresaw the US signing an agreement in Copenhagen, even in the event that a federal cap-and-trade scheme had not passed in the US Senate. Moreover, on 15 January, the chair of the key House Energy Committee, Congressman Henry Waxman, said he hopes a climate bill will be adopted by 22 May this year.

Hence, Point Carbon concluded, US climate policy seems to be changing, and this could significantly alter the course of the international negotiations.

“The purpose of this report, in light of the developments in the US, is to analyse how the negotiations in Copenhagen could unfold and what this might mean for future emissions and mitigation costs,” the organisation said.

It said that one pivotal question is whether the US will participate in negotiations over legally binding emissions obligations. If the answer to this is yes, time appears too short to negotiate a legal instrument that would replace the Kyoto Protocol, which took almost ten years to get in place.

If, as Kerry hinted, the ambition is to get an agreement in place in the short run, the most realistic option seems to be to change the Kyoto Protocol so that the US could sign an amended version.

“If the goal is to negotiate a new international agreement that would replace the Kyoto Protocol by December 2009, the most realistic option is probably an agreement that does not include legally binding emissions obligations on an international level,” Point Carbon said. “This could, for example, be a framework agreement that would govern the linking of various national/regional trading schemes.”

In our view, the organisation said, the course of action that is most consistent with exercising ‘leadership’ would be negotiating in order to amend the Kyoto Protocol, including the aim to deepen commitments and broaden participation.

“Alternative US strategies are likely to either end up in prolonged negotiations where it is highly uncertain that the end-result will be anything better than the Kyoto Protocol, or alternative international agreements that will probably give less emission reduction than an amended Kyoto Protocol,” Point Carbon said. “Hence, taking Obama’s leadership ambitions at face value, we would expect that the US would engage in reforming the Kyoto Protocol so that it would be palatable in the US. The fact that the Obama administration appears to be loaded with individuals that were instrumental in bringing the Kyoto Protocol around in 1997 increases the probability of the US adopting such a negotiation strategy.”

The organisation expects to get a clearer view of Obama’s strategy during the next round of negotiations in Bonn on 29 March to 8 April, the first time the new administration participates in formal negotiations.

Point Carbon said its report presents four scenarios for the outcome of the international negotiations in Copenhagen where obligations adopted range from a marginal reduction compared to business-as-usual to a scenario where global emissions level out in the period 2015-2020.

The study assumes that as countries take on deeper commitments they will adopt more effective policy instruments, meaning that in the least ambitious scenario only 7% of the cost effective potential is realized, while in the most ambitious scenario 48% will be realized.

“As a consequence of the efficiency improvement, the average as well as the marginal costs of reducing emissions are lower in the most ambitious scenario (18€/t and 36€/t, respectively) than in the scenario that gives the smallest emissions reductions (21€/t and 48€/t),” the organisation said.

The first scenario, ‘Race to the Top’, assumes that the US will accept to negotiate over legally binding emissions obligations (e.g. an amended Kyoto Protocol). Over a period one to two years after the Copenhagen meeting, the US and the EU successfully push a number of non-Annex I countries (i.e. non-industrialised countries) to take on emission obligations. These obligations will either be for the whole economy, or for selected sectors.

The second scenario, ‘Done Deal’, is a variant of the first scenario, but assumes that the US and the EU do not succeed in broadening participation. Except for the current Annex I (industrialised) countries, almost no other countries accept new obligations before 2020.

The third scenario, ‘Linking Framework’, is a development where a new international agreement under the United Nations Framework Convention on Climate Change (UNFCCC), but without legally binding obligations, replaces the Kyoto Protocol. Emission reductions will be driven by the planned regional cap-and-trade schemes, which are assumed to be linked in order to create an integrated market. This includes emissions trading schemes (ETS) in the EU, US, Australia, Canada and Japan.

Finally, the fourth scenario, ‘EU Alone’, is a development where the negotiations break down, but where the EU and its new members in the period covered make good of its ambitions of reducing emissions by 20% by 2020, compared to 1990.

In many ways, Point Carbon said, ‘Race to the Top’ comes out as the most attractive scenario. It gives reductions that are in line with Intergovernmental Panel on Climate Change (IPCC) scenarios, and will entail the lowest average and marginal costs.

Obama’s choice will determine whether this scenario takes precedence.

“If the US is not going to negotiate over legally binding emission obligations, we are likely to end up in the ‘Linking Framework’ scenario,” the report stated.

“If the US accepts negotiating over binding commitments, we are likely to be in the ‘Race to the Top’ scenario,” it added. “And if we are going to get a deal in Copenhagen with binding commitments, it is likely to be an amended version of the Kyoto Protocol.”

“Assuming that the US will aim for a deal in Copenhagen with binding emission obligations, what will it take to bring about the participation and obligations of the ‘Race to the Top scenario?” Point Carbon asked.

It added the answer has two aspects, a political one, and a legal one.

“The political one appears the more difficult one by far,” the organisation’s report stated. “One issue is that the US will have to get access to the substantive negotiations on the post-2012 regime.”

These negotiations take place between the parties to the Kyoto Protocol, where the US is not a party and does not automatically have access to these negotiations.

“We do not know how this should be dealt with procedurally, but we guess that some clever US lawyers will come up with constructive suggestions,” Point Carbon said.

Although the US might have the necessary national legislation in place and be ready to adopt international commitments, many of the non-Annex I countries will need at least one to two years after Copenhagen to prepare and agree to taking on national or sector obligations.

“So, in order to achieve the level of participation envisaged under the ‘Race to the Top’ scenario, an extended period, probably two years, will be needed in order to set the obligations for non-Annex I countries,” the report said.

To the extent that non-Annex I will accept obligations probably depends on whether the US and the EU are able to push together, Point Carbon said.

Both sticks and carrots can and probably will have to be applied. One carrot could be access to the market, e.g. if more countries take on obligations, the US and the EU will lift the limitations on import of carbon. Another one could be that the EU and the US state that they will accept more ambitious obligations if more countries join in, which, of course, will lead to deeper reductions but also increased revenues for the countries that are likely to export carbon credits and allowances.

“Convincing non-Annex I countries to take on obligations will probably also entail a strong bilateral element,” Point Carbon said. “This could be though the application of ‘soft power’ in bilateral meetings, but also more concrete discussions of how to implement cap-and-trade in the sectors that have obligations and how this should be linked in order to construct one common market.”

The organisation said the US has traditionally been strong at applying such bilateral pressure, and we would expect that this would be the case in a ‘Race to the Top’ scenario.

“However, in order to bring it about it will be important that the EU also engages actively in bilateral discussions on how to expand its trading scheme outside the EU, beyond linking to the US,” the report stated.

In order to be ratified, the Copenhagen deal will have to be sold as something else than the ‘Kyoto Protocol’ to the US public, but suggesting exactly how best to spin this in the US is beyond our competence, Point Carbon said.

“Whether or not the US ratifies an agreement in the end is probably less important than whether the country will play a constructive role in the process running up to the deal,” the organisation added. “It is possible to foresee that the US will sign a deal and implement it, but not ratify it. In this case, the impact on the global emissions and the global carbon market might be equal regardless of whether the US ratifies the agreement in the end.”

Click here to read the full report.