Saturday, March 18, 2006

Let My People Trade

Much has been said about the Kyoto Protocol and its provisions for global emissions trading. It has been described by some as a provision for the exportation of wealth, and by others as some form of foreign aid. Neither of these descriptions accurately captures the mechanism.

Article 17 of the Kyoto Protocols authorizes Annex I countries to meet their Kyoto emissions reduction quotas in part through the purchase of credits (there are actually three different types of credits, but we will just call them credits for now) from other Annex I nations. As these transactions are only between Annex I, i.e. developed nations, this is hardly a wealth transfer or aid to the developing world (which is not a bad thing either). It does however provide an advantage to countries which are aggressive in reducing CO2 emissions and are able to achieve compliance quicker.

Global emissions trading as a mechanism to reduce greenhouse gas emissions has a lot of advantages:

  • It is a global solution. Global warming is a global phenomenon, caused by the global over production of greenhouse gasses. All countries must therefore contribute to the solution.
  • It does not dictate how a country domestically achieves compliance; it simply provides a market based incentive to do so.
  • It benefits from comparative advantage and increases flexibility. It may be much cheaper for Country A to reduce emissions by a certain amount than for Country B. If Country A is in Kyoto compliance, then it would be far more cost effective for Country B to purchase credits from Country A than to achieve the same level of emissions reduction through domestic programs. This scenario is then a win-win situation. In addition to the global abatement benefits, Country B achieves credit for emissions reduction at a lower cost and Country A gets a benefit for reducing emission below the required level. The planet doesn’t really care where the reductions occur.
  • It has already been demonstrated to be an efficient and effective abatement regime in the US. The US, under the Clean Air Act or 1972 adopted a SO2 emissions trading regime. Under this regime SO2 targets were met far ahead of schedule with savings over the life of the program estimated to be greater than $10B.

Finally, let us not confuse a global CO2 emissions trading program with a domestic cap and trade program – considered by many to be a cornerstone of compliance efforts in Canada. A cap and trade program is likely to be a key part of any domestic Kyoto implementation plan – even the Conservatives new “made in Canada” approach. Domestic cap and trade system work because within an industry, they make dirty (CO2) producers more expensive and cleaner (CO2) producers less expensive. This provides the essential conditions for a market based domestic abatement approach and may finally put renewable energy, subsidy wise, on the same footing as fossil fuels.

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