The World Must Keep its Nerve over Kyoto

The global response to climate change is approaching its most critical hour since President George W. Bush rejected the Kyoto protocol. Kyoto, now ratified by 119 countries, establishes a basic structure of commitments and incentives for curbing greenhouse gas emissions. Its initial round of targets runs to 2012 and negotiations on the next round are due to start by 2005, provided the agreement enters into force. But it will do so only if the Russians ratify it - and they have made plain that they are in no hurry to do so.

Meanwhile, the US has been refining its approach to the problem, which is to avoid the whole nasty business of capping emissions by talking about technology instead. It is starting to pour billions of dollars into research on technologies such as carbon sequestration, which involves storing carbon dioxide emissions. It has embarked on an international campaign to sign bilateral deals on climate technology co-operation and suggests that this offers a viable alternative to Kyoto.

This confuses means and ends. Technology is a means of cutting emissions, but the primary incentive for developing it has to come from emission commitments. Governments are not good at delivering industrial technologies: there has to be a market for them. Carbon caps, brought down to the industrial level with initiatives such as the European Emissions Trading Scheme, create such a market for low-carbon technologies.

At the same time, the US strategy does highlight a complementary truth. Attaining the end requires means. Kyoto-style caps can certainly stimulate investment in carbon-reducing technologies that are already commercially viable. But these are insufficient to take us on to deeper, longer-term reductions. Fossil fuels have the benefits of a century or more's development and it will be a long time before most low-carbon industries are mature enough to compete unaided. The vague expectation of future carbon caps, coupled with the uncertainties created by the US and Russia, is not a sufficient basis on which companies can invest in developing low-carbon technology.

So reducing emissions is going to be easier and cheaper if the Kyoto process is complemented by programmes that provide more direct support to innovative low-carbon technologies. These should range from government research and development to nurturing new industries. Governments have elements of such programmes but a clearer, more consistent framework is needed. Only governments can control the risks surrounding future development of low-carbon markets, so it is appropriate that they share the risks of building the necessary technology.

Scepticism about the capacity of governments to "pick winners" is useful as a cautionary guide but it should not become an excuse for ignoring real issues in technology policy. Intelligent policy can work with the private sector to support innovation without superseding market discipline. But international co-ordination will be needed to bring maximum benefits. The European Union's regulations on state aid, for example, which draw no clear distinction between subsidising lossmaking enterprises and supporting the emergence of new, clean technologies, are one area for consideration.

Dealing with climate change requires governments to focus on both means and ends - on the technology to cut emissions and on the incentives to use that technology. If they can do so, there is hope that the next round of climate change negotiations will be productive. The stage will be set by the United Nations climate conference that opens in Milan next month.

Russia may have scuppered hopes that Milan would mark Kyoto's entry-into-force, but the rest of the world must keep its nerve. The EU and Canada have announced that they will abide by the terms of Kyoto whether or not Russia ratifies it. If all 119 countries that have ratified Kyoto can make a declaration to that effect, the momentum will be unstoppable. Russia will discover it no longer has the world at its mercy. Continued prevarication will start to cost it some of the clean investment it would otherwise attract.

At the same time, recognising the importance of technology policy offers a way to re-engage the US in constructive dialogue. Important questions remain unanswered about international technology co-operation. They deserve serious discussion, which Milan could help initiate. And if the US is serious about investing in low-carbon technology, sooner or later it will accept the need for incentives to use it.