The Kyoto treaty sets emissions limits for industrialized countries and for the EU, which decided itself how to divide the burden among member countries. It requires the countries that ratified it to reduce their overall emissions by 5% from 1990 levels. The caps, which expire in 2012, won't go into effect until 2008.
It is up to each participating nation to determine which companies to slap restrictions on. After a government sets an emissions limit for a company, it gives that company just enough permits to cover it. Companies that reduce emissions below their caps can sell excess credits to companies that don't have enough. Each company must decide how much to cut emissions and how many permits to buy from others.
Developing nations face no caps. Diplomats decided it wasn't fair to burden their economies right away with pollution controls, given that the industrialized world had faced no restrictions during decades of growth. However, the treaty includes a unique mechanism for involving the developing world in the process. Carbon reduction projects in developing nations generate emissions permits, or credits, which can be sold to companies in industrialized nations facing emissions caps. In effect, these companies can fulfil some of their emission-reduction obligations by financing pollution-control projects in the developing world.
The Kyoto Protocol was supposed to harness market forces to solve global warming. But industry has proved adept at fulfilling its obligations without cutting down much on fossil fuels such as oil, coal and natural gas. It is doing this largely by funding projects in the developing world that destroy potent but uncommon greenhouse gases.
Under the treaty, projects targeting more potent gases generate more credits than projects targeting carbon dioxide. The treaty covers six kinds of greenhouse gases. At one end of the spectrum is carbon dioxide. It accounts for 77% of all man-made greenhouse-gas emissions the U.N. says, but it is also the weakest gas. At the other end is HFC-23, a by-product of the manufacture of a common refrigerant. Every ton of it is 11,700 times as damaging to the atmosphere as a ton of carbon dioxide the U.N. says. But despite its high potency, the gas accounts for less than 1% of the effect of man-made greenhouse-gas emissions, the U.N. says. Under the Kyoto trading system, each credit represents one carbon dioxide-equivalent ton of avoided emissions, so a project that eliminates one ton of carbon-dioxide emissions generates one sellable credit. A project that gets rid of one ton of HFC-23 emissions generates 11,700.
Installing machinery on refrigerant plant to incinerate HFC-23 is inexpensive. According to the World Bank, generating one carbon credit through an HFC-23 project typically costs less than $1. Generating a credit from a renewable-energy project erecting a wind turbine or a solar panel-can cost $5 to $10, the World Bank says. Such credits currently sell for as much as €12 or about $25. So the economic incentives to undertake HFC-23 Projects have far exceeded those for fossil-fuel reduction projects.
Between 2002, when credits generated in developing countries began trading, and the end of 2006, HFC-23 Projects accounted for 46% of all developing-world credits traded-by far the biggest chunk of that market, according to the World Bank. AII told, at least 70% of developing-world credits traded during that market's first five years came from projects targeting gases other than carbon dioxide, the World Bank says. At present, most eligible plants that emit HFC-23 have been signed up for carbon-credit projects. As a result, projects targeting less-potent gases are getting more funding. Programs to reduce the burning of fossil fuels - a far bigger environmental problem - accounted for less than one-third of the developing-world credits traded between 2002 and last year the World Bank says. But they have begun getting more attention.
Some investors in the carbon market cite another reason for the scarcity of clean-energy projects: a panel of U.N.-sanctioned officials who meet periodically in Bonn, Germany, and decide which proposed carbon-reduction projects will get to sell credits. The panel approves only environmental projects it determines wouldn't happen without the sale of the credits. Clearing that bar can be difficult for clean-energy projects. Those related to potent gases such as HFC-23 and methane have an easier time, because they rarely make economic sense without the carbon-credit revenue. U.N. officials say that to keep the system honest, it is important not to subsidize projects that would happen anyway.
The broader question is whether a cap-and-trade system targeting industry is enough to meaningfully curb greenhouse gases. Some favour the introduction of carbon-emission taxes, saying that would push consumers to trim their energy use. Others say blunter tools are needed, such as tougher government rules on the energy efficiency of cars and buildings. Industry has long resisted such steps.
Source: WSJ, 05/12/07
