Home » Articles » Volume 37 » Issue 2 » Repudiation and Regret: Is the United States Sitting Out the Kyoto Protocol to Its Economic Detriment?

 
 

Repudiation and Regret: Is the United States Sitting Out the Kyoto Protocol to Its Economic Detriment?

 

The moral and scientific reasoning behind the United States’ refusal to become a party to the Kyoto Protocol has been debated, and the potential environmental consequences of that decision cannot be ignored. But what about the effect on the American economy? Do United States business leaders, many of whom pushed hardest against ratification, stand to suffer in the long term? Are there sectors of the economy, particularly those specializing in “green energy” solutions, that will lose ground to overseas competition?

Indications suggest that the Kyoto Protocol’s mandates are already proving to be a boon to businesses specializing in renewable energy technologies and that those located in party countries have an edge over their American counterparts. The Protocol also encourages increased energy efficiency, potentially resulting in considerable business savings, and participation in already-lucrative carbon trading markets. The benefits to U.S. businesses, however, are uncertain at best. Finally, the Kyoto Protocol establishes programs such as the Clean Development Mechanism which, though in its early stages, could prove to be quite profitable for corporations willing to invest in developing countries. Participation by American companies, though, entails complications that businesses in party countries are unlikely to face.

This Comment explores these issues, and others, as it discusses the likely impact of the Bush Administration’s opposition to the anti-global warming treaty in light of the government’s claim to be acting in the best interests of the American economy.

I. Introduction

In early 2001, the Bush Administration withdrew from the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC)[1]by removing the United States’ signature from the agreement.[2]The government’s stated rationale was that the global warming treaty would hamstring the American economy by causing an unacceptable loss of jobs and money.[3]While that rationale has been challenged,[4]with the protocol’s entry into force in 2005 another possibility is becoming increasingly salient: The United States may actually end up suffering economically and otherwise by having rejected the treaty.

First, the U.S. government’s position on the issue of climate change has translated into a lack of incentives for businesses and state and local governments to invest in technologies that improve efficiency and reduce emissions, both for domestic use and export. Second, only Kyoto Protocol Parties may use the new carbon trading markets to offset their emissions of greenhouse gases (GHGs). Consequently, American companies have less incentive than firms in states that have ratified the Kyoto Protocol to engage in what is shaping up to be a potentially profitable system that also encourages efficiency, innovation, and competitiveness. Finally, only entities from Parties to the Kyoto Protocol may fully participate in the Clean Development Mechanism (CDM), under which the carbon emissions of entities in developed countries may be offset by investments in emission abatement projects in developing countries. U.S. companies may participate, but they may not use the resulting emissions credits to their gain under the Protocol. The CDM may thus give foreign companies the upper hand in seeking contracts for CDM projects in developing countries.

In September 2004, the largest solar power plant in the world opened in Germany.[5]Built using technology from Shell Solar, a Dutch company, and Siemens, a German firm, the plant can provide electricity for approximately 1,800 European homes.[6]In addition, the facility will reduce global annual carbon dioxide emissions by about 3,700 tons.[7]Two months earlier in China, German Foreign Minister Joschka Fischer inaugurated what is ostensibly the largest solar collector manufacturing facility in the world.[8]For Fischer, the Sino-German joint venture was proof of the business opportunities available to those with expertise and a willingness to participate in the renewable energy sector.[9]Meanwhile, 7,000 miles away, AstroPower, the second largest solar cell manufacturer in the United States, closed its doors for the last time, driven into bankruptcy by poor sales and crushing debt.[10]“It’s almost embarrassing,” said renewable energy consultant Christopher Reed, discussing the situation in the American solar industry.[11]“The photovoltaic technology came out of Bell Labs in the U.S. We should be the world leaders.”[12]

The successes of the German solar industry are directly related to government policies favoring technologies that enable the country to work towards meeting its Kyoto obligations.[13]Similarly, early (and gradually tapering) government subsidies led to the installation of 144,000 residential photovoltaic systems in Japan by 2002.[14]But in the United States, production of solar cells dropped fourteen percent in 2003 alone (in part due to the bankruptcy of AstroPower).[15]While subsidies and other incentives in Germany and Japan have encouraged production and lowered the price of renewable energy technologies, allowing companies from those countries to become involved in far-flung projects such as the plant in China, U.S. policy has been “piecemeal and erratic,” discouraging investment.[16]Federal tax credits, for example, are constantly lapsing before eventually being re-approved, if at all.[17]

The United States is also losing the opportunity to gain valuable experience in industrial efficiency and emissions credits[18]trading, two ways in which Kyoto Protocol Parties are achieving compliance with their emissions reduction targets. British Petroleum (BP) instituted a company-wide emissions reduction scheme and, in the words of the CEO, “added around $650 million of shareholder value, because the bulk of the reductions came from the elimination of leaks and waste.”[19]London-not New York-has become home to the burgeoning emissions trading market.[20]With individual trades of 100,000 credits not uncommon[21]and the price of an individual credit (representing one metric ton of carbon dioxide or equivalent GHGs) as high as 31 Euro,[22]companies in a position to sell credits-having met their Kyoto Protocol obligations through improved efficiency, for example, and reaping the financial rewards of that as well-stand to make a tidy profit. The activities of Kyoto Protocol Parties have not gone unnoticed in the United States, where a number of business leaders see the imposition of emissions restrictions-if not outright accession[23]by the United States to the Protocol itself-as an eventual reality in this country, and worry that they are losing ground to overseas competitors.[24]

Finally, the United States may come to regret its rejection of the Kyoto Protocol for another reason: American companies could find themselves cut out of the bidding processes for CDM projects. The CDM allows the transfer of emissions credits to developed countries or their companies in exchange for participation in GHG-reducing projects in developing countries. Examples of current and proposed projects include an Anglo-Japanese landfill gas management project in Brazil and a Dutch windfarm in China.[25]Almost half the turbines for the windfarm project will come from GE’s Wind Energy division, underscoring the opportunities renewable energy companies could expect from full U.S. participation in the CDM.[26]Sweetening the deal for Kyoto Protocol Parties is the World Bank which, through a number of “carbon funds,” is providing low-priced emissions credits (by purchasing those credits and then pooling them for sale to groups of buyers) and brokerage assistance to companies and states that engage in CDM projects.[27]But without American ratification of the Protocol, U.S. companies could either be shut out of such project negotiations entirely or, at the very least, find themselves competing with companies for whom offsetting emissions, not financial gain, is paramount.

This Comment discusses American non-participation in the Kyoto Protocol and its economic implications for U.S. companies and the economy in general. Part II introduces the Kyoto Protocol and describes the United States’ response to it under the Bush Administration. Part III examines the lack of a consistent focus on renewable energy by the U.S. government as contrasted with the policies of Kyoto Protocol Parties, both in terms of the domestic market and overseas opportunities, and the increase in industrial efficiency expertise in countries that have ratified the Kyoto Protocol. Part IV considers the growing emissions trading market in view of the possibility that American companies may soon find themselves at a competitive disadvantage in that area. Part V indicates the nascent CDM system is likely to handicap U.S. companies that could otherwise be top bidders for projects in developing countries. As to the overall question of whether the U.S. economy will suffer as a result of the Bush Administration’s stance on the Kyoto Protocol, Part VI concludes that it most likely will and that the administration may have reason to regret its decision even before it leaves office.

II. The Kyoto Protocol: Background and the U.S. Response

Before examining the impact of the U.S. withdrawal from the Kyoto Protocol, it is important to understand how the Protocol works and why the Bush Administration objects to it. In 1992, the United Nations Framework Convention on Climate Change[28]was signed in Rio de Janeiro. Although it lacked any binding targets or fixed timetables, it laid the foundation for later agreements by committing the parties to the convention to beginning the process of formulating national climate change mitigation policies. [29]It also established 1990 as the baseline year for the parties to use in developing their GHG-reduction targets.[30]

The Kyoto Protocol,[31]an addition to the UNFCCC, was adopted in 1997 and came into force in February 2005 after Russia added itself to the list of 141 ratifying countries.[32]The stated aim of the parties to the UNFCCC was to stabilize “greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”[33]Those gases include: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride.[34]The Kyoto Protocol’s plan to achieve that goal involves specific emissions reduction targets within a specific timeframe for most of the developed countries among its parties.[35]For example, if the United States became a Party it would be required to reduce its GHG emissions seven percent below the amount of its 1990 emissions[36]between 2008 and 2012.[37]Iceland, by contrast, is allowed to increase its emissions by ten percent.[38]Such a surplus of emissions capacity is known as “hot air.” Russia is probably the biggest winner in terms of hot air. Its target under the Kyoto Protocol is zero percent (i.e., it needs to be at or below its 1990 levels by 2012),[39]but the collapse of its economy after the 1990 benchmark left it with a thirty-percent emissions surplus.[40]

Emissions credits[41]are issued to countries by the CDM Executive Board based on their original emissions targets and those countries are then expected to implement national policies geared towards meeting their targets.[42]Developed countries are further required to assist developing countries in reducing their emissions through knowledge transfers[43]and funding.[44]Countries that fail to reach their goals are subject to stringent penalties.[45]

However, the Protocol established three mechanisms designed to give the Parties sufficient flexibility to attain their targets. These mechanisms-emissions trading,[46]the CDM,[47]and Joint Implementation (JI),[48]which allows developed countries or those with economies in transition to engage in emissions reductions projects in each other’s countries-were vigorously promoted by the U.S. delegation in Kyoto,[49]and emissions trading was something of an American brainchild, having been used to reduce acid rain in New England.[50]

Although Vice President Al Gore signed the Kyoto Protocol on behalf of the United States in 1997 after considerable modifications were made to accommodate U.S. demands,[51]the Bush Administration has since removed the U.S. signature,[52]citing studies predicting economic hardship if the United States accedes to it.[53]As mentioned above, the accuracy of the studies and the motivations of those involved with their development and release have been questioned.[54]One criticism of the Administration’s stance is that it is based on calculations that ignored the potential benefits to U.S. businesses from participation in the Kyoto Protocol’s flexibility mechanisms[55]and from the increased energy efficiency that would have almost certainly resulted from American accession to the treaty.[56]

But with no indication that the Administration is considering reversing its position, the debate over the rationale for withdrawal is not likely to be resolved anytime soon. However, evidence that President Bush’s stance may end up hurting U.S. businesses is more readily available, and it is to that possibility that this Comment now turns.

III. Renewable Energy Technologies and Energy Efficiency

Probably the most obvious sector of the economy to discuss when analyzing the impact of the U.S. withdrawal from the Kyoto Protocol is that of renewable energy technologies. In the United States, clean technologies occupy a tiny niche (two percent) in the energy sector.[57]The oil, natural gas, and coal industries got off the ground thanks in large part to federal subsidies in the form of tax breaks and exploration rights on public lands, many of which continue today.[58]The renewable energy sector, on the other hand, has long complained of a lack of government incentives or, when such incentives do exist, their unpredictable and unreliable nature.[59]The most prominent federal incentive program, a corporate production tax credit passed as part of the Energy Policy Act in 1992,[60]has to be renewed after it lapses every few years, leading to frustration among industry leaders who view a consistent, long-term renewable energy policy as vital to the success of their sector.[61]Similarly, the federal Million Solar Roofs Initiative,[62]launched in 1997, lacks a dedicated funding source and has achieved less than half of its goal.[63]

Some states have taken the reins, and it is in those states that the clean energy sector has fared best. State-level programs in Pennsylvania, for example, have enabled financing for renewable energy projects and have convinced the world’s second largest wind technology manufacturer to open its American headquarters and a large wind turbine plant in the state.[64]California recently launched its own million solar roofs plan with long-term initiatives based on the highly successful Japanese program[65]and expressly aimed at fostering a sense of market certainty.[66]

Government incentives are vital to the long-term viability of the clean energy sector because prices for renewable energy technology are still prohibitively high in many cases. But Japan, in particular, has proven that government support does not have to be perpetual. The solar panel installation subsidy there, discussed in Part I,[67]was reduced from fifty percent of the cost to ten percent in a few years as increased demand drove down the price of solar photovoltaic cells.[68]The government-supported increase in domestic research and production of renewable energy technologies has allowed countries like Japan and Germany to export the fruits of those efforts abroad and to become world leaders in the sector. Japanese firms produce half the global supply of photovoltaic cells,[69]and Germany is the world’s largest producer of wind energy, with more than twice the installed capacity of the United States.[70]As discussed in Part I, this predominance has enabled firms in these countries to land lucrative contracts in China and elsewhere and to eclipse the United States in a global renewable energy technology market worth well over 25 billion dollars annually.[71]

The Global Energy Innovation Index, which tracks the fifty biggest “pure play”[72]publicly-traded renewable and low-carbon energy technology companies in the world, paints a striking picture. In the first quarter of 2005, those companies in countries that are party to the Kyoto Protocol did very well, with shares rising an average of nearly twenty-two percent[73]and those of companies based in Frankfurt soaring almost fifty-three percent.[74]By contrast, the shares of the U.S.-based companies on the index dropped by an average of just under fourteen percent.[75]While there may be no single explanation for this divergence, these are well-established companies, and for their stock prices to race in opposite directions almost as soon as Russia ratified the Kyoto Protocol could forecast prosperity for renewable energy technology companies fortunate enough to be located in Party countries.

It is fair to say that accession to the Kyoto Protocol would likely propel the American government to implement renewable energy incentives as a strategy for meeting its emissions reduction obligations. As discussed previously, it is mainly the “boom and bust” cycle of government assistance, or the complete lack of assistance, that hinders progress in the U.S. renewable energy sector. There is no lack of desire,[76]however, and it has been noted that the archetypal entrepreneurial American spirit contributes to the fact that more energy technology startups are created in the United States than in Europe.[77]Presumably, all that is needed is some indication that the national government is willing to support the clean energy sector in the twenty-first century with even a fraction of the resources devoted to the mineral extraction industries in the twentieth.[78]In addition to arguments in favor of consistent federal assistance to the clean energy sector, part of the criticism of the Bush Administration’s economic analysis of the Kyoto Protocol is that it disregards savings from increased energy efficiency and the potential for job creation, which are aspects of clean energy technology that are also pertinent to the discussion, particularly in light of global competition. The 650 million dollars BP saved through increased efficiency prompted by its internal trading system is only one example.[79]The German chemical company BASF cut its annual costs by 500 million dollars through improved efficiency at just one of its manufacturing sites, and in the United States Dow Chemicals saved itself four billion dollars over an eleven-year period through increased energy efficiency and reduced carbon dioxide emissions by thirty-two percent.[80]Money saved through efficiency is money that can be spent elsewhere in an increasingly competitive global marketplace, which is why Lord Browne of BP referred to his company’s savings as “shareholder value.”[81]

In terms of employment, a number of studies have forecast significant job creation if the U.S. government starts investing more seriously in renewable energy.[82]Experiences in other countries bear this out. Germany, for example, currently generates approximately six percent of its electricity from wind, and its wind technology industry employs more than 45,000 people.[83]One study suggests that a more substantial level of investment in United States. renewables, on the order of 300 billion dollars, could create over three million new jobs.[84]A comprehensive study also found that the renewable energy sector creates more jobs per unit of energy delivered than does the fossil fuel-based sector, and that investment in renewables would benefit the economic sectors and geographical areas of the United States that have suffered the highest levels of unemployment.[85]In short, renewables could help rescue the beleaguered United States manufacturing sector and ameliorate the overall unemployment situation in the country.

IV. Emissions Trading

American non-participation in the Kyoto Protocol also affects the extent to which American companies will participate in the Protocol’s flexibility mechanisms, which in turn could have a bearing on those companies’ business prospects. Analysis of this issue starts with a discussion of the emissions trading mechanism. Once a party to the UNFCCC ratifies the Kyoto Protocol and implements a national program involving policies and measures aimed at reducing GHG emissions, monitoring emissions levels,[86]and reporting progress to the convention,[87]that nation’s appropriate government agency specifies emissions limits for companies in certain industries[88]and issues emissions credits in amounts commensurate with those limits. Those companies are then legally bound either to reduce their emissions below the government-imposed ceiling or to acquire additional credits from companies whose emissions already are less than the maximum allowed.[89]The same is true of the parties themselves: If the United Kingdom, for example, continues to have difficulty meeting its obligations under the Kyoto Protocol,[90]it could buy some of Russia’s hot air.

Thus, from the standpoint of regulated businesses, entities whose emissions exceed the limit set by the country’s permitting authority are not required to invest in smokestack scrubbers or to start purchasing wind-generated electricity. Instead, they can find willing sellers in any developed country (that is, any country listed in Annex I of the UNFCCC)[91], companies whose emissions are below the mandated limit, and buy their credits in a forum very similar to the bond market. This system was patterned after the sulphur dioxide (which contributes to acid rain) emissions trading system-a component of the U.S. Acid Rain Program-in the United States in the 1990s.[92]That program, after much initial criticism, was widely seen as having successfully used market forces to cut sulphur dioxide in the air over the United States by more than thirty percent.[93]

The idea behind emissions trading of any kind is to internalize externalities by assigning a monetary value to pollution, thus ensuring that it gets factored into business decisions. The key element, as demonstrated by the U.S. Acid Rain Program and voluntary efforts like the Chicago Climate Exchange (CCX),[94]is an emissions limit, or cap (hence the phrase “cap-and-trade”), either government- or self-imposed. Individual companies or industry sectors then determine how best to meet that requirement. They decide for themselves whether it makes more financial sense for them to cut emissions outright or to buy someone else’s surplus credits. Also, they can decide whether to seek out willing sellers on their own or, for convenience and speedier results than those available with a negotiated contract, buy credits through an emissions trading market.[95]Thus, on paper, and to a large degree in practice as well, emissions trading satisfies both the free market proponents, who prefer the carrot to the stick when regulation is unavoidable, and the environmentalists, whose focus is on reducing the overall level of GHGs in the atmosphere.

The GHG emissions trading mechanism under the Kyoto Protocol got off to a slow start. The United Kingdom established a trading market in 2001 and Denmark followed with one of its own, but trades of emissions credits were small and of a mainly experimental nature for the next few years.[96]In early 2005 the CCX established a subsidiary in London and Amsterdam, the European Climate Exchange (ECX),[97]but credits were stagnating at around five Euro each. Since Russian ratification and entry into force of the Kyoto Protocol, however, the market has taken off, with the price of a credit rising to more than thirty-one Euro[98]and hundreds of thousands of credits being traded daily. The ECX hit a new record on January 19, 2006, with credits worth 5.2 million metric tons of carbon dioxide trading hands, including a single 3.3 million ton-equivalent transaction.[99]One side of that deal managed to rake in more than €85 million in profit.

The ECX and rival markets, such as Nord Pool[100]in Norway and the European Energy Exchange (EEX)[101]in Germany, are used by European companies to comply with the emissions caps administered by their national governments under the EU’s Emissions Trading Scheme (EU ETS),[102]a legally-binding cap-and-trade system for all twenty-five member states. Accompanying the establishment of emissions markets has been the establishment of emissions brokerage houses and consulting firms,[103]and even large European banks want a piece of the action.[104]London, in particular, is becoming a hub for the new trading systems.[105]

More importantly, however, it is the European countries and their business leaders who are designing what will likely turn out to be the model, if not the foundation, of a future global emissions trading system.[106]American companies may be able to join and execute trades in the overseas markets, depending on the membership rules, and they can buy or sell credits “over the counter” (bypassing any centralized trading system and dealing directly with another company). But if people like DuPont’s Tom Jacob are correct in assuming that U.S. mandatory emissions caps are inevitable,[107]American companies could one day find themselves competing in-among other possibilities-a European-designed market system with European companies that are highly skilled in emissions trading and, due to their efforts to comply with emissions restrictions, in a position to be sellers rather than buyers. Furthermore, if the price of a credit rises, the American companies will find themselves paying considerably more than the early bird Europeans did to offset their emissions.[108]

U.S. multinational corporations may also find themselves in a particularly complicated situation with regard to emissions trading. Their overseas operations could be subject to regulation by Kyoto Protocol Parties in which they do business.[109]If so, they will be required to adhere to the emissions limitations set by their host countries, whether through actual reductions or by acquiring allowances or credits from other entities.[110]In addition, multinationals with efficient, low-emission facilities within the United States will be unable to benefit from those facilities under the overseas trading schemes, while companies based in Kyoto Protocol Parties will be able to leverage the totality of their worldwide operations and gain the maximum benefit from the emissions markets.[111]Indeed, the inability of foreign multinationals to benefit from emissions reductions at their U.S.-based facilities could make them think twice about maintaining those operations (or establishing new ones) and could even convince them to

relocate their facilities to countries where their GHG curtailment efforts would count toward their Kyoto Protocol obligations.

Finally, American multinationals will be subject to, in the words of Goldman Sachs, “a confusing regulatory environment”-the Clean Air Act and state and regional GHG reduction schemes for their U.S.-based operations and the Kyoto Protocol for their overseas facilities.[112]Such a scenario adds administrative costs and sows confusion.[113]U.S. auto manufacturers are already facing this quandary as they find themselves compelled to choose between complying with two separate car emissions standards-the federal Clean Air Act on one hand and the more stringent California Air Resources Board (CARB) regulations[114]on the other-or adopting the California standards for its entire domestic market.[115]Similarly, U.S. multinationals with operations subject to the Kyoto Protocol may find that it makes more sense to reduce emissions at all their facilities rather than dealing with the complications of multiple regulatory schemes.

American companies may enjoy a competitive advantage during the initial months or years following the Kyoto Protocol’s entry into force as many of their counterparts in Europe will be compelled either to cut emissions by upgrading their facilities or to purchase credits on the market. The German chemical giant BASF, for example, will either have to reduce its annual emissions by 85,000 tons or spend up to 700,000 dollars per year on additional credits.[116]Meanwhile, U.S. corporations will be able to continue to ignore emissions in their record-keeping. But in the long run, it seems more likely than not that companies in Kyoto Protocol Parties will gain valuable experience in operational efficiency and emissions reduction, leading to opportunities for the acquisition of profit and useful skills in the emissions markets, and that American firms that fail to move beyond a business-as-usual mentality will find themselves outflanked by leaner, greener overseas competitors.

V. The Clean Development Mechanism

While two aspects of the Kyoto Protocol discussed thus far-increased use of clean energy technology and emissions trading-pertain mainly to developed countries, the Clean Development Mechanism (CDM) is where developing countries will play their biggest role under the Protocol, at least initially. It is also this flexibility mechanism in which the impact of U.S. non-participation in the Kyoto Protocol is probably the least clear.

Under the CDM, companies, governments, and organizations such as the World Bank attempting to offset GHG emissions may invest in, or even carry out, emissions reduction projects in developing countries. For example, one of the first approved CDM projects involved the sale in October 2005 of nearly 50,000 credits by the Indian government to SenterNovem, the Dutch government’s energy and climate agency.[117]The project involves generating electricity from mustard crop residues.[118]The CDM is premised on the notion that it is easier to slow down emissions growth in developing countries than to reduce emissions in wealthy nations and on the idea that, since GHGs are a global problem, the geographical location of the reductions is irrelevant.[119]So far, the major buyers of such credits, besides the Dutch government, include the Japanese government and the World Bank, which administers a number of funds to buy credits awarded to developing countries’ projects by the UNFCCC and then either acts as a broker by locating individual buyers or pools the credits for groups of buyers to offset their emissions.[120]Recently, private companies are becoming more involved in the CDM as well.[121]

The CDM is quite controversial, however, and is potentially deeply flawed. For example, the rules defining a valid emissions reduction project under the CDM are extremely complicated.[122]Part of the issue involves the complexity of the “additionality” requirement, which seeks to ensure that any new emissions abatement projects are undertaken in addition to any already-planned projects.[123]If a power plant was going to be upgraded anyway for business reasons, for example, that upgrade could not be counted as a CDM project.

More fundamental concerns, however, involve the motivations and methodologies of the entities engaging in CDM projects. As has been demonstrated by the majority of the projects submitted to the CDM Executive Board for consideration, companies and governments so far have been targeting the “low-hanging fruit” GHGs like methane and potent hydrofluorocarbons like HFC-23, which are considered much more damaging than carbon dioxide but which comprise a tiny percentage of the GHGs in the atmosphere contributing to global warming.[124]So if a company can invest in a methane-capture project at a landfill in Latin America, that company will meet its emissions reduction target much more quickly and cheaply-while doing nothing to reduce the level of carbon dioxide in the atmosphere-than if it had been compelled to make direct cuts in its own emissions. Critics charge that, for these reasons, the CDM will do little, if anything, to provide a real environmental benefit to the host country or to change industrial behavior in the developed countries, which is what is required ultimately if the levels of GHGs in the atmosphere can be expected to stabilize.[125]

From a business perspective, however, the CDM offers a potentially profitable opportunity. Companies subject to the Kyoto Protocol can use their need for emissions credits to barter their way into projects in developing countries. Once their reputations and business footholds are established, they can bid for other, for-profit endeavors. This ability to forego all or most of the remuneration they would ordinarily receive from a development project because they need emissions credits to help them balance their books is a considerable advantage over competitors not similarly situated. American companies, of course, figure among those competitors.

This is not to say that U.S. firms will be unable to participate in the CDM. Under the 2001 Marrakesh Accords to the Kyoto Protocol, private entities from non-parties may participate in unilateral CDM projects (that is, projects planned and negotiated solely by a developing country’s government, rather than those also involving one of the countries listed in Annex B of the Kyoto Protocol).[126]American multinationals with operations in Kyoto Protocol Parties can engage, and have been engaging, in emissions abatement projects in developing countries, possibly in hopes of one day being able to use the resulting credits to offset their emissions under a U.S.-mandated cap-and-trade system or, as discussed above, with the goal of enhancing their business prospects in the host country. For instance, Coca-Cola is considering investing in a methane capture project in Brazil,[127]and ChevronTexaco is preparing an emissions reduction project through one of its subsidiaries in Indonesia.[128]Some experts are advising American companies with subsidiaries or parents in Kyoto Protocol Parties to invest in CDM projects with an eye towards selling the resulting credits, using them to offset emissions, or saving them for use under a future climate change mitigation scheme in the United States.[129]

But while American companies can participate in the CDM, most likely the only companies that would be able to outbid their competitors in Party countries would be those whose international operations are large enough to absorb taking a financial hit on a project that would pay primarily in emissions credits. Small- to mid-size companies, especially those not heavily subsidized by the U.S. government such as renewable energy companies, might find it difficult to win CDM contracts over rivals for whom those emissions credits are a crucial element of their business strategy. Such a scenario would reduce further the ability of American companies to serve the growing energy needs of many developing countries.

VI. Conclusion

The impact of the U.S. rejection of the Kyoto Protocol is complicated to predict, but a few possibilities are reasonably likely to become reality. First, and most certain, is the likelihood that the Protocol will lead party governments to provide support to the clean energy sectors in their countries, enabling them to become world leaders in renewable energy technology and allowing those companies to emerge as profitable enterprises in their own right, no longer needing subsidies and tax breaks and providing jobs and boosting their local and national economies.[130]Also, by forcing their industries to comply with emissions caps, those governments will ensure that many companies become highly efficient and competitive players in the world’s markets.[131]American companies, on the other hand, may continue to languish in the “boom and bust” cycle of a fossil fuel-centric national energy policy.

Second, the experience gained by companies in party states through the establishment and growth of emissions trading schemes will probably prove invaluable, particularly as more countries accede to the Kyoto Protocol, and could end up being the highly profitable icing on the cake of their increased industrial efficiency.[132]Meanwhile, U.S. companies stand to lose out on the chances for profit in the short term and, in the long term, to be forced to play catch-up if the United States imposes an independent domestic cap-and-trade scheme or one linked to the Kyoto Protocol.[133]

Finally, less predictably but potentially even more damaging, U.S. companies may find it difficult to participate in energy generation and emissions abatement projects in China, India, and elsewhere. Competition from foreign governments, private firms, and behemoths such as the World Bank may make offers from American companies, particularly those that lack the resources or the long-term vision to accept an initial loss of income, less attractive under the CDM than those of their competitors in party countries.[134]

The evidence is far from conclusive, but after having been a key player in the Kyoto Protocol negotiations, shaping the eventual structure of the agreement before ultimately walking out ostensibly for fear of hurting its business sector, the United States may one day find itself asking to be let back in. And it may be those same businesses that provide the impetus for such a request.


* J.D. and Certificate in Environmental and Natural Resources Law 2007, Lewis & Clark Law School; B.A. 1993, Furman University; Environmental Law, 2005-2007. The author is grateful to Professor Chris Wold for suggesting the topic and for his excellent editorial advice.

[1] Kyoto Protocol to the United Nations Framework Convention on Climate Change, Dec. 10, 1997, 37 I.L.M. 22 (1998) (entered into force Feb. 15, 2005) [hereinafter Kyoto Protocol].

[2] Bradford C. Mank, Standing and Global Warming: Is Injury to All Injury to None?, 35 Envtl. L. 1, 20 (2005).

[3]See,e.g., Bush Firm Over Kyoto Stance, CNN, Mar. 29, 2001, http://archives.cnn.com/
2001/US/03/29/schroeder.bush/ (last visited Apr. 15, 2007) (quoting President Bush: “I will not accept a plan that will harm our economy and hurt our workers.”).

[4]See,e.g., Natural Res. Def. Council, Bush Administration Errs on Kyoto Global Warming Agreement, http://www.nrdc.org/globalWarming/akyotoqa.asp [hereinafter NRDC](last visited Apr. 15, 2007) (rebutting a number of misconceptions and Bush Administration claims and asserting that no economic studies support the administration’s dire predictions); Press Release, World Wildlife Fund, New Report Disproves Bush Claims that Global Warming Treaty Would Hurt U.S. Economy (July 12, 2001) [hereinafter WWF], available at http://www.common
dreams.org/news2001/0712-06.htm (arguing that U.S. savings through increased efficiency would outweigh expenditures on cleaner technology by 2010); U.S. Dep’t of Energy, Scenarios for a Clean Energy Future (2000), available at http://www.ornl.gov/sci/eere/cef/ (discussing the economic boon the Kyoto Protocol has been to European and Japanese clean technology companies and the money saved by companies investing in increased efficiency).

[5] Germany Opens World’s Biggest Solar Plant, Deutsche Welle, Aug. 9, 2004, http://www.dw-world.de/dw/article/0,1564,1321857,00.html (last visited Apr. 15, 2007).

[6]Id.

[7]Id.

[8]German Know-How For China’s Energy Sector, Deutsche Welle, July 16, 2004, http://www.dw-world.de/dw/article/0,1564,1269079,00.html (last visited Apr. 14, 2007).

[9]Id.

[10] Nat’l Envtl. Trust, Rejecting the Kyoto Protocol: Lost Business, Lost Markets, Lost Opportunities for the U.S. 16 (2004) [hereinafter NET Report] (on file with author).

[11] Stephanie Hemphill, Report: Kyoto treaty rejection hurts U.S. businesses, Minn. Pub. Radio, Dec. 15, 2004, http://news.minnesota.publicradio.org/features/2004/12/14_hemphills_
energypolicy/ (last visited Apr. 15, 2007).

[12] Id.

[13] German Embassy, Background Papers: Promoting Renewable Energy Sources, http://www.germany-info.org/relaunch/info/archives/background/renewable.html (last visited Apr. 15, 2007) (discussing the incentives provided by the German government under the Renewable Energy Sources Act of 2000).

[14] Viviana Jim滩攀稀Ⰰ 䔀愀爀琀栀 倀漀氀椀挀礀 䤀渀猀琀⸀Ⰰ㰀椀㸀 㰀⼀椀㸀圀漀爀氀搀 匀愀氀攀猀 漀昀 匀漀氀愀爀 䌀攀氀氀猀 䨀甀洀瀀 ㌀㈀ 倀攀爀挀攀渀琀Ⰰ 栀琀琀瀀㨀⼀⼀眀眀眀⸀攀愀爀琀栀ⴀ瀀漀氀椀挀礀⸀漀爀最⼀䤀渀搀椀挀愀琀漀爀猀⼀㈀  㐀⼀椀渀搀椀挀愀琀漀爀㄀㈀⸀栀琀洀 ⠀氀愀猀琀 瘀椀猀椀琀攀搀 䄀瀀爀⸀ ㄀㔀Ⰰ ㈀  㜀⤀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㄀㘀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㄀㘀∀ 渀愀洀攀㴀∀开攀搀渀㄀㘀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀㰀椀㸀 㰀⼀椀㸀㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㄀㔀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀㰀椀㸀 䤀搀⸀㰀⼀椀㸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㄀㜀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㄀㜀∀ 渀愀洀攀㴀∀开攀搀渀㄀㜀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㄀㘀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 䠀攀洀瀀栀椀氀氀Ⰰ㰀椀㸀 猀甀瀀爀愀 㰀⼀椀㸀渀漀琀攀 ㄀㈀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㄀㠀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㄀㠀∀ 渀愀洀攀㴀∀开攀搀渀㄀㠀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀㰀椀㸀 㰀⼀椀㸀㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㄀㜀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀㰀椀㸀 䤀搀⸀㰀⼀椀㸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㄀㤀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㄀㤀∀ 渀愀洀攀㴀∀开攀搀渀㄀㤀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㄀㠀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 吀栀攀 琀攀爀洀猀 ∀挀爀攀搀椀琀∀ 愀渀搀 ∀愀氀氀漀眀愀渀挀攀∀ 愀爀攀 猀漀洀攀琀椀洀攀猀 甀猀攀搀 椀渀琀攀爀挀栀愀渀最攀愀戀氀礀Ⰰ 戀甀琀 琀栀攀礀 愀爀攀 琀攀挀栀渀椀挀愀氀氀礀 搀椀昀昀攀爀攀渀琀⸀ 䄀 挀爀攀搀椀琀 椀猀 愀眀愀爀搀攀搀 琀漀 愀渀 攀渀琀椀琀礀 昀漀爀 攀砀挀攀攀搀椀渀最 椀琀猀 洀愀渀搀愀琀攀搀 攀洀椀猀猀椀漀渀猀 挀甀琀猀 愀渀搀 挀愀渀 琀栀攀渀 戀攀 琀爀愀搀攀搀 椀渀 愀渀 攀洀椀猀猀椀漀渀猀 琀爀愀搀椀渀最 洀愀爀欀攀琀⸀ 䄀渀 愀氀氀漀眀愀渀挀攀 椀猀 眀栀愀琀 椀猀 搀漀氀攀搀 漀甀琀 琀漀 攀渀琀椀琀椀攀猀 愀琀 琀栀攀 猀琀愀爀琀 漀昀 琀栀攀 攀洀椀猀猀椀漀渀猀 爀攀搀甀挀琀椀漀渀 爀攀最椀洀攀⸀ 䄀氀氀漀眀愀渀挀攀猀 洀愀礀 琀栀攀渀 戀攀 戀漀甀最栀琀 昀爀漀洀Ⰰ 猀漀氀搀 琀漀Ⰰ 漀爀 琀爀愀搀攀搀 眀椀琀栀 漀琀栀攀爀 攀渀琀椀琀椀攀猀 搀椀爀攀挀琀氀礀Ⰰ 搀攀瀀攀渀搀椀渀最 漀渀 栀漀眀 眀攀氀氀 琀栀攀 攀渀琀椀琀椀攀猀 愀爀攀 昀愀爀椀渀最 椀渀 爀攀氀愀琀椀漀渀 琀漀 琀栀攀椀爀 攀洀椀猀猀椀漀渀猀 氀椀洀椀琀猀⸀ 䤀渀琀✀氀 䔀洀椀猀猀椀漀渀猀 吀爀愀搀椀渀最 䄀猀猀✀渀Ⰰ 䐀椀昀昀攀爀攀渀挀攀 䈀攀琀眀攀攀渀 愀渀 䄀氀氀漀眀愀渀挀攀 愀渀搀 䌀爀攀搀椀琀Ⰰ 栀琀琀瀀㨀⼀⼀眀眀眀⸀椀攀琀愀⸀漀爀最⼀椀攀琀愀⼀眀眀眀⼀瀀愀最攀猀⼀椀渀搀攀砀⸀瀀栀瀀㼀䤀搀匀椀琀攀倀愀最攀㴀㌀㘀㤀 ⠀氀愀猀琀 瘀椀猀椀琀攀搀 䄀瀀爀⸀ ㄀㔀Ⰰ ㈀  㜀⤀⸀ 䘀漀爀 昀甀爀琀栀攀爀 攀砀瀀氀愀渀愀琀椀漀渀猀 漀昀 琀栀椀猀 搀椀猀琀椀渀挀琀椀漀渀 愀渀搀 漀琀栀攀爀猀Ⰰ 洀漀猀琀 漀昀 眀栀椀挀栀 愀爀攀 戀攀礀漀渀搀 琀栀攀 猀挀漀瀀攀 漀昀 琀栀椀猀 䌀漀洀洀攀渀琀Ⰰ 猀攀攀 刀椀挀栀愀爀搀 刀漀猀攀渀稀眀攀椀最 攀琀 愀氀⸀Ⰰ 倀攀眀 䌀琀爀⸀ 漀渀 䜀氀漀戀愀氀 䌀氀椀洀愀琀攀 䌀栀愀渀最攀Ⰰ 吀栀攀 䔀洀攀爀最椀渀最 䤀渀琀攀爀渀愀琀椀漀渀愀氀 䜀爀攀攀渀栀漀甀猀攀 䜀愀猀 䴀愀爀欀攀琀 ⠀㈀  ㈀⤀Ⰰ 㰀椀㸀愀瘀愀椀氀愀戀氀攀 愀琀㰀⼀椀㸀 栀琀琀瀀㨀⼀⼀眀眀眀⸀瀀攀眀挀氀椀洀愀琀攀⸀漀爀最⼀最氀漀戀愀氀ⴀ眀愀爀洀椀渀最ⴀ椀渀搀攀瀀琀栀⼀愀氀氀开爀攀瀀漀爀琀猀⼀椀渀琀攀爀渀愀琀椀漀渀愀氀开最爀攀攀渀栀漀甀猀攀开最愀猀开⼀㰀戀爀㸀 椀渀搀攀砀⸀挀昀洀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㈀ 㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㈀ ∀ 渀愀洀攀㴀∀开攀搀渀㈀ ∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㄀㤀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 䨀漀栀渀 䈀爀漀眀渀攀Ⰰ 㰀椀㸀䈀攀礀漀渀搀 䬀礀漀琀漀㰀⼀椀㸀Ⰰ 㠀㌀ 䘀漀爀攀椀最渀 䄀昀昀⸀ ㈀ Ⰰ ㈀㘀 ⠀㈀  㐀⤀Ⰰ 㰀椀㸀愀瘀愀椀氀愀戀氀攀 愀琀 㰀⼀椀㸀栀琀琀瀀㨀⼀⼀眀眀眀⸀昀漀爀攀椀最渀愀昀昀愀椀爀猀⸀漀爀最⼀㈀  㐀 㜀 ㄀昀愀攀猀猀愀礀㠀㌀㐀 㐀ⴀ瀀 ⼀樀漀栀渀ⴀ戀爀漀眀渀攀⼀戀攀礀漀渀搀ⴀ欀礀漀琀漀⸀栀琀洀氀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㈀㄀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㈀㄀∀ 渀愀洀攀㴀∀开攀搀渀㈀㄀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㈀ 崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 䄀渀最甀猀 䴀挀䌀爀漀渀攀Ⰰ 㰀椀㸀匀瀀攀挀椀愀氀 刀攀瀀漀爀琀㨀 䰀漀渀搀漀渀 䰀攀愀搀猀 椀渀 䌀愀爀戀漀渀 䴀愀爀欀攀琀㰀⼀椀㸀Ⰰ 匀甀渀搀愀礀 吀椀洀攀猀 ⠀唀⸀䬀⸀⤀Ⰰ 䄀甀最⸀ 㜀Ⰰ ㈀  㔀Ⰰ 㰀椀㸀愀瘀愀椀氀愀戀氀攀 愀琀㰀⼀椀㸀 ㈀  㔀 圀䰀一刀 ㄀㈀㔀㐀㄀㠀 㠀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㈀㈀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㈀㈀∀ 渀愀洀攀㴀∀开攀搀渀㈀㈀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㈀㄀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 䄀渀搀爀攀眀 䌀愀瘀攀Ⰰ 㰀椀㸀䌀椀琀礀 䰀椀昀攀㰀⼀椀㸀Ⰰ 䐀愀椀氀礀 吀攀氀攀最爀愀瀀栀 唀䬀Ⰰ 伀挀琀⸀ ㄀ Ⰰ ㈀  㔀Ⰰ 栀琀琀瀀㨀⼀⼀眀眀眀⸀琀攀氀攀最爀愀瀀栀⸀挀漀⸀甀欀⼀㰀戀爀㸀 洀漀渀攀礀⼀洀愀椀渀⸀樀栀琀洀氀㼀砀洀氀㴀⼀洀漀渀攀礀⼀㈀  㔀⼀㄀ ⼀㄀ ⼀挀挀挀椀琀礀㄀ ⸀砀洀氀 ⠀氀愀猀琀 瘀椀猀椀琀攀搀 䄀瀀爀⸀ ㄀㔀Ⰰ ㈀  㜀⤀⸀㰀⼀瀀㸀ഀ   㰀⼀搀椀瘀㸀  㰀搀椀瘀 椀搀㴀攀搀渀㈀㌀㸀  㰀瀀㸀㰀愀 栀爀攀昀㴀∀⌀开攀搀渀爀攀昀㈀㌀∀ 渀愀洀攀㴀∀开攀搀渀㈀㌀∀ 琀椀琀氀攀㴀∀∀㸀㰀⼀愀㸀 㰀猀甀瀀㸀㰀猀甀瀀㸀嬀㈀㈀崀㰀⼀猀甀瀀㸀㰀⼀猀甀瀀㸀 䴀愀琀栀攀眀 䌀愀爀爀Ⰰ 㰀椀㸀䔀洀椀猀猀椀漀渀 倀爀椀挀攀猀 䐀爀漀瀀 琀漀 ㄀㌀ⴀ䴀漀渀琀栀 䰀漀眀 䄀昀琀攀爀

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