A Change in the Climate

The bitter wrangling over the Kyoto Protocol on climate change is approaching its endgame. There is growing speculation that Friday's Russia-European Union summit could pave the way for Russia's ratification of the treaty, the final step required to bring it into force.

Russia has, in effect, the casting vote on the controversial 1997 treaty that was designed to reduce industrialised countries' emissions by at least 5 per cent between 1990 and 2012. Each country is allowed to emit a certain amount of greenhouse gases. If it emits less than its allowance, it can sell that emission "credit" to other countries that are over their limit. The treaty needs Russia's support to come into force because it requires ratification by enough countries to represent 55 per cent of the industrialised world's emissions.

The outcome of discussions within Russia over the treaty will have a far-reaching impact on how the world tackles one of the biggest long-term challenges it has ever faced.

Russia's internal debate intensified this week, ahead of Thursday's deadline for state bodies to give Vladimir Putin, Russia's president, their advice on the treaty. Kyoto's critics focused on its potential threat to growth, with one adviser describing it as a "death pact" that will strangle Russia's recovering economy.

Its supporters have pointed to the prospect of large financial gains for Russia from selling surplus carbon credits to other countries that have signed the treaty. These surplus credits - resulting from closure of large swaths of Russian industry in the 1990s, coupled with generous allowances under the Protocol - could be worth as much as $10bn. The pro-Kyoto camp is cautiously optimistic that Mr Putin will confirm ratification in the next few months because of the surplus credits and the progress Moscow has made in trade and energy negotiations with the EU.

Companies take early action

The business community is usually cast as the villain in the debate on global warming. But a small but influential group of companies has taken a different approach.Read

Confirmation from Mr Putin that Russia plans to ratify the treaty could have significant political impact. Following its rejection by the US three years ago, the treaty's survival would be seen as a snub to the Bush administration symbolic and a diplomatic triumph for Europe, its most vocal champion.

Kyoto is seen as a positive step because it is the first international treaty on the environment to attempt to harness market mechanisms, in which emission credits can be traded, to achieve its goals in the most cost-effective way possible. As well as scope for trading credits between industrialised countries, it creates incentives for investing in "clean" technology in developing countries.

But whatever its symbolic and political importance, its environmental significance would be much less clear-cut. The Protocol has several shortcomings. It is short-term in its outlook, has limited targets and lacks the participation of the US, which has the largest emissions. The Protocol would cover less than half the world's greenhouse gas emissions and only governs emissions over the coming decade. The concessions made during years of tortuous negotiations and the withdrawal of the US in 2001 mean that the treaty need have virtually no impact on global emissions.

This problem arises because there is little pressure on developed countries to cut their emissions; they can simply buy credits from other countries. The EU, Japan and Canada could achieve their goals simply by buying the surplus carbon credits of the countries that were formerly in the Soviet Union. Although this outcome would be politically unpopular, very few countries are on track to meet their targets through their own efforts on curbing emissions from factories, homes and vehicles.

A focus on technology

Many countries promote the need to curb greenhouse gas emissions in terms of morality. But the US administration prides itself on having environmental policies that are "grounded in reality".

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Kyoto, like many other policy options such as harmonised carbon taxes or research and standards protocols, suffers from offering skewed economic benefits. The way it is designed means that most countries are economically better off if others reduce emissions and they themselves do not. For the US, the costs of complying with Kyoto would exceed the domestic benefits of reducing the damage caused by climate change, says Scott Barrett, a professor at Johns Hopkins University.

Many economists are sceptical about the validity of cost-benefit analysis in addressing a problem that is long-term, irreversible, poorly understood and potentially catastrophic. But Kyoto's chequered history adds credence to Prof Barrett's concern about the lack of incentives to encourage countries to participate in the treaty. In addition, he says, countries' willingness to co-operate is undermined by the absence of tough penalties for non-compliance.

Kyoto's critics say that it fails to address the sharp rise in emissions expected from developing countries. Moreover, its mechanisms are unlikely to broaden co-operation from key developing countries over time.

The need to broaden co-operation has proved one of the most fundamental difficulties facing international climate negotiators. The Kyoto Protocol was built on an understanding that it was not morally defensible or politically realistic to expect developing countries to act before their living standards have risen and wealthy countries have started to deliver real reductions. But fears that developing countries would gain an unfair competitive advantage prompted US senators to vote unanimously in 1997 against any climate agreement that did not involve developing countries taking on emissions targets.

Even if Kyoto does not come into force, it would still leave an important legacy. The EU and Canada have voluntarily promised to take action to meet their Kyoto targets regardless of the treaty's legal status. In the most ambitious policy yet put forward, the EU will in January launch an emissions trading scheme that will curb the emissions of 15,000 factories. Ultimately, this trading scheme could link up with others established in different regions and states.

In the US too, many states have rejected their government's approach as inadequate (see below). More than 20 states have passed or proposed legislation on greenhouse gas emissions or developed carbon registries or similar measures. California is now imposing curbs on vehicle emissions of greenhouse gases that could have a significant impact on the US motor industry.

But, in practice, climate policies would inevitably be weakened by a failure to ratify Kyoto. Participants in Kyoto have already seen support for taking tough actions to curb emissions eroded. Germany and the UK, which have taken strong political stands in favour of Kyoto, have recently been forced to make concessions to industry in their approach to the EU trading scheme.

Many manufacturers are strongly opposed to unilateral action that would increase their energy costs. "Why should we damage our competitiveness for something that will not have environmental benefits?" asks the EEF, a UK manufacturers' trade body.

A failure to ratify the treaty would also undermine negotiations on a post-Kyoto agreement due to start next year. Ultimately any assessment of Kyoto's value depends less on its short-term impact than on whether it lays the foundations for the deeper, wider curbs on greenhouse gas emissions that are required over the coming decades.

Developing countries might refuse to become involved unless there is clear evidence that the industrialised countries have taken action. A decade or more could be lost in the effort to reach an international agreement.

Mr Putin is clearly aware of these considerations and has been using them as a bargaining chip in negotiations over Kyoto and other issues. The current tensions around the Kyoto Protocol are a classic case of diplomatic negotiations Russian-style. Officials rarely draw official linkages, but they are skilled in indicating how other concessions by the other side could prove helpful in reaching agreement on the issue.

The EU has argued with increasing vehemence that Russia should meet its commitment, made in 2002, to ratify the treaty. As a result, it has provided Russia with a lever to seek other concessions such as support for its bid for entry into the World Trade Organisation, easier transit to and from its Kaliningrad enclave on the Baltic coast, and tariff and quota modifications ahead of EU enlargement.

In theory, there are benefits for Russia in pushing its industry towards energy-saving measures. But with only slow progress towards the liberalisation of domestic electricity and gas prices, it is the incentive of EU concessions on other matters that is likely to provide Moscow with the greatest motivation to match its previous positive words with action.

Even if Russia ratifies the Protocol, a follow-up treaty will need to be much more flexible. Flexibility and a sensitivity to the politics of individual countries will be crucial in securing a successful future agreement, according to a study by the Pew Center on Global Climate Change, a US thinktank.

Raul Estrada, the former Argentine ambassador to China, who played a decisive role in securing agreement for the Kyoto Protocol six years ago, has argued that it is "imperative" to begin thinking about a broader approach that could draw in non-participants. A single protocol might prove insufficient, he says. It might be necessary to have two or three protocols, with different sets of commitments to meet countries' different needs.

The political difficulties posed by Kyoto are likely to be dwarfed by the difficulties of deciding what it should lead to. "There is no getting around national interest," according to Eileen Claussen, president of the Pew Center. "Climate change is a common challenge, but countries will engage in collective action only if they perceive it to be in their interest."

Additional reporting by Andrew Jack

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Companies take early action

The business community is usually cast as the villain in the debate on global warming. Corporate lobbyists across the world successfully have diluted and delayed climate policies.

But a small but influential group of companies has taken a different approach. These companies have made voluntary cuts in carbon emissions and have campaigned for regulations that would force others to follow suit.

Johnson & Johnson has become the largest corporate user of wind power in the US. Swiss Re, the reinsurer, is going "carbon neutral" over the next 10 years by cutting emissions and investing in World Bank carbon sequestration projects. Lafarge is reducing its emissions from its cement kilns by using innovative fuels, such as sewage treatment sludge.

They are partly motivated by a desire to enhance their reputations. But they are also driven by a belief that carbon constraints are inevitable. By taking action early, t hey will secure technological and marketing advantages.

Last month, about 20 companies joined forces with a number of city, state and national governments in the Climate Group, a non-profit organisation working to pool expertise on cutting emissions. Practical action, the participants argued, could not wait for an international agreement.

There is a longstanding gap between the attitudes of the small group of environmentally conscious companies and the rest of the business community, however.

A study of FT500 companies published by the Carbon Disclosure Project, an institutional initiative backed by the Rockefeller Foundation, concluded that many companies remain firmly "behind the curve".

Despite this, the CDP detected "an increased sense of urgency with respect to climate risk and carbon finance". This was being driven by pressure from financial market authorities, expectations of rising wholesale electricity prices under the European Union's emissions trading scheme and the high cost of last year's weather-related disasters.

Companies are increasingly conscious that climate change will bring new risks and opportunities.

Axa, the French insurer, argues that climate risk - which it said would affect about 20 per cent of global gross domestic product - is more important than interest rate or foreign exchange risk.

Some investors are also becoming more assertive about the potential risk that climate change poses to their portfolios. In the US, 13 public pension fund leaders managing assets of nearly $800bn called on the Securities and Exchange Commission to "eliminate any doubt" that companies should be disclosing the financial risks of climate change in their securities filings.

Companies and investors ignore climate risks at their peril, says Phil Angelides, California State Treasurer. "In global warming, we are facing an enormous risk to the US economy and to retirement funds which Wall Street has so far chosen to ignore."

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Focus on technology has few supporters outside US

Many countries promote the need to curb greenhouse gas emissions in terms of morality. But the US administration prides itself on having environmental policies that are "grounded in reality".

The centrepiece of Washington's climate strategy is its emphasis on technological innovation, which it sees as "the only acceptable cost-effective option" to reduce greenhouse gas emissions.

It is spending more than $4bn a year on targeted tax credits and climate-related research and development directed at nuclear fusion, fission, renewable energy and hydrogen fuels. It is also exploring the prospect of carbon sequestration - capturing and storing carbon dioxide in deep saline aquifers - which would pave the way for zero emissions from coal-fired power stations.

Carbon sequestration could play a vital role, the US argues. Given the abundance and relatively low cost of coal, the most carbon-intensive of fuels, it is unrealistic to assume that it will be left in the ground. "There are tremendous amounts of coal available in the world, especially in China and India, and they are going to be used," said a US official last week.

But the US has largely failed to convince the rest of the world of the merits of its approach. Critics say that its emphasis on research and development is valuable in finding new ways to lower emissions, but that alone it is inadequate.

It would do virtually nothing to curb emissions in the short term and would not stimulate the industrial sector to develop and Use new technologies, which is crucial to delivering technological change on the scale needed to tackle climate change.