JURIST Guest Columnist Hua Wang, Northwestern University School of Law Class of 2012, writes on the need for policies that combine market incentives with outright prohibitions to achieve enforcement and compliance with international environmental regimes…

Climate change threatens catastrophic harm of a global nature, and thus, regional responses are inadequate and only global action can effectively address the problem. Therefore, an effective international agreement on climate change must include developing countries, which are typically reluctant to curb economic development for an environmental problem mainly caused by industrialized countries. The North and South need to work together to encourage and facilitate the reduction of greenhouse-gas emissions in the most economically efficient manner, especially in the context of the current economic crisis.

The Kyoto Protocol attempted to bring the world together in reducing greenhouse gases. It contains several innovative flexibility instruments, including emissions trading, joint implementation and a clean development mechanism (CDM) for project-based cooperation with developing nations. It established targets and timetables for participants to reach binding greenhouse gas reductions by a particular time period. In addition, the regime subsequently created multiple avenues for financial aid to developing nations. However, the Kyoto Protocol did not state how the flexibility instruments were to work or how the agreement was to be enforced.

Climate change is a long-term, invisible problem with uncertain effects. The world cannot wait for climate change to produce a dramatic event, such as the ozone hole, to spark powerful public concern. Nations that will suffer the most from climate change, which are mostly developing nations in the South, do not have the financial resources to slow climate change. Meanwhile, those nations with the institutional and financial capacity are reluctant to invest in emissions reductions because they face less serious and certain effects from climate change. Since most of the adverse effects will occur in the southern hemisphere, wealthy countries are reluctant to take action especially if it means higher energy prices.

The US, for example, opposes Kyoto Protocol’s legally binding international controls on greenhouse gases because it would negatively impact its large coal and oil reserves, as well as automobile, steel and chemicals industries. As the main emitters of greenhouse gases, the withdrawal of the US may give it a competitive advantage in the global marketplace if the Kyoto Protocol is implemented. However, the noncooperation of the US with the Kyoto Protocol will dampen the efficacy of the climate change regime by discouraging meaningful global participation from other countries due to competitiveness concerns.

Without developing countries, the potential for a successful international market system is greatly diminished. The relatively low-cost reductions of private investments to developing countries are a feasible substitute for the more expensive domestic reductions in industrialized countries. A domestic carbon tax allows private sector emitters to receive partial credit for taking part in emissions-reducing projects in these nations. Companies will be able to improve their public relations and delay governmental regulations by transferring environmentally sound technology to non-Annex I countries.

Many developing countries lack the infrastructure needed to achieve local environmental objectives and to contribute to the resolution of global environmental concerns. Under CDM, countries with insufficient expertise and capital will now have the financial and technical support needed for domestic efforts to reduce local pollution. Developed nations have proposed significant financial support for developing nations in the nonbinding Copenhagen Accord, such as $30 billion from 2010 to 2012 and up to $100 billion a year by 2020.

Moreover, advanced technologies from multinational corporations will allow the South to become market leaders in sustainable energy methods and achieve development goals in a less carbon-intensive fashion. Associated benefits include employment, government revenues and community-based livelihoods, as well as reduced air and water pollution.

Opponents of tradeable permits oppose the idea of creating rights to pollute and allowing rich countries to buy their way out of domestic reductions. Some developing countries distrust market principles because of its negative implications for national sovereignty, economic development and eco-imperialism. They fear that investors’ economic motivations will conflict with social and environmental development. In trying to maximize profits, the North might dictate the direction of projects, overlook the benefits of existing technology in the South and focus on large-scale, centralized projects that do not serve the rural poor.

Market schemes provide incentives for all countries to undertake greenhouse gas abatement and create a unique win-win situation. The establishment of trading systems and taxes for emissions can result in sharply reduced compliance costs and lower the impact of limiting emissions. However, improperly constructed and executed mechanisms under the Kyoto Protocol may be ineffective and will underachieve either through outright internal collapse or the inability to approach the cost savings that such mechanisms promise.

Market-based mechanisms present large uncertainties in the potential costs and approaches to achieving reductions. The likelihood of an agreement between the North and South depends on improving commercial incentives for private investors that bear all the costs and commercial risks of technology transfers.

Furthermore, any program to limit global climate change depends on the participation of non-Annex I countries to be efficient and cost-effective. Equity must be incorporated into the design of any market system if the system is to meet its promise of delivering a successful, market-based strategy for meeting emission reduction obligations. Instead of a one-time parachute drop of new equipment, industrial countries need to provide the necessary infrastructure for the long-term success of development projects. Multinational companies must assess local socioeconomic conditions to determine whether there is sufficient market demand and local support for successful adoption.

To be effective, the Kyoto Protocol must include clear and verifiable guidelines on reporting and accountability mechanisms for international taxes and emissions trading. Without these protocols, market schemes will suffer from a lack of confidence in its fairness and accuracy. A legal framework and executive body of North and South representatives must be established to monitor the effectiveness of new investment, quantify emissions reductions and assign liability for failed projects. These procedures are crucial to the establishment of new markets capable of reducing the costs of meeting reduction targets in a mandated system of limited emissions.

Hua Wang completed her undergraduate studies at Duke University. Upon graduating, Wang worked as an investment-banking analyst at Lehman Brothers. She later joined Accenture, and focused on health care consulting and business development for outsourcing. Hua has worked on global projects and helped guide large companies and organizations through difficult market corrections while advising them on growth strategies and acquisitions. She will be joining Proskauer in the fall.

Suggested citation: Hua Wang, Markets, Greenhouse Gas and the Kyoto Protocol, JURIST – Dateline, June 14, 2012, http://jurist.org/dateline/2012/06/hua-wang-kyoto-protocol.php