A Low-Cost Way to Control Climate Change

Article excerpt

In December 1997 in Kyoto, Japan, representatives of 159 countries agreed to a protocol to limit the emissions of greenhouse gases. Now comes the hard part: how to achieve the reductions. Emissions trading offers a golden opportunity for a company or country to comply with emissions limits at the lowest possible cost.

Trading allows a company or country that reduces emissions below its preset limit to trade its additional reduction to another company or country whose emissions exceed its limit. It gives companies the flexibility to choose which pollution reduction approach and technology to implement, allowing them to lessen emissions at the least cost. And by harnessing market forces, it leads to innovation and investment. The system encourages swift implementation of the most efficient reductions nationally and internationally; provides economic benefit to those that aggressively reduce emissions; and gives emitters an economically viable way to meet their limits, leading to worldwide efficiency in slowing global warming.

Benefits to the United States from emissions trading would most likely be achieved domestically. However, trading between developed nations and between developed and developing nations has much to offer. It can accelerate investment in developing countries. And it gives developed countries the flexible instruments they say they need to gamer the political support necessary to agree to large emissions reductions. In a recent speech in Congress, Sen. Robert Byrd (D-W. Va.) stated that, "reducing projected emissions by a national figure of one-third does not seem plausible without a robust emissions-trading and joint-implementation framework."

If effective trading systems are to be designed, tough political and technical issues will need to be addressed at the Conference of the Parties in Buenos Aires in November 1998 - the next big meeting of the nations involved in the Kyoto Protocol. This is especially true for international trading, because different nations have significantly different approaches to reducing greenhouse gases and because many developing countries are opposed to the very notion of trading. However, if trading systems can be worked out, the United States and the world could meet emissions commitments at the lowest possible cost.

The challenge

The Kyoto Protocol requires developed countries to reduce greenhouse gas (GHG) emissions to an average of 5 percent below 1990 levels in the years from 2008 to 2012. The United States has agreed to cut emissions by 7 percent below its 1990 level. Russia and other emerging economies have somewhat lesser burdens. However, estimates indicate that at current growth rates, the United States would be almost 30 percent above its 1990 baseline for GHG emissions by 2010. Most emissions come from the combustion of fossil fuels. Carbon dioxide is responsible for 86 percent of U.S. emissions, methane for 10 percent, and other gases for 4 percent. Substantial reductions will be needed.

One strategy would be a tax on the carbon content of fuels, which determines the amount of GHGs emitted when a fuel is burned. Although this may be the most efficient way to reduce GHG emissions, it is politically unrealistic in the United States. Our domestic strategy is more likely to be a choice between a trading system linked with a cap on overall emissions and the more traditional approach of setting emission standards for each sector of the economy.

The strategy in other countries may be different. During the Kyoto debates, a sharp difference was evident between the United States, which favored a trading approach to achieving national emissions targets, and European nations, which are contemplating higher taxes as well as command-and-control strategies such as fuel-efficiency requirements for vehicles and mandated pollution controls for utilities and industry. Nonetheless, all countries can still benefit from international trading. …