WCEL staff counsel Chris Rolfe was a member of the Canadian delegation to the December conference on climate change held in Kyoto, Japan. In this issue of WCEL News, Chris shares his analysis of the outcomes of the Kyoto conference.

Progress in Kyoto Not Enough to Avert Climate Change, Marred by Loopholes

In December 1997, nations of the world met in Kyoto, Japan and successfully negotiated legally binding greenhouse gas emission reduction commitments for industrialized nations. While the Kyoto Protocol represents an important step forward, its effectiveness is limited by a number of loopholes and it falls far short of what is needed to significantly mitigate climate change.

The Kyoto Protocol establishes a commitment period between the years 2008 and 2012 in which average emissions from developed nations are to be 95% of 1990 levels. Individual allowable emissions targets are set for different nations. Canada is to reduce its emissions by six percent; the US by seven percent; European Union nations by eight percent. The Russian Federation is only required to stabilize emissions at 1990 levels.

The commitments included in the Kyoto Protocol are binding in a way that the Framework Convention on Climate Change was not. The Framework Convention, signed in 1992, failed to establish that nations must do more than "aim" to stabilize emissions at 1990 levels by 2000.

Looking at loopholes

In a recent brief to the federal government, West Coast Environmental Law carefully analyzed the Kyoto Protocol, identifying and quantifying a number of loopholes and potential loopholes. These include:

• The possibility that Russia and other eastern European nations may, without any real emission reductions occurring, be able to sell surplus international emission quotas to Canada and other rich nations, obviating the need to make emission cuts at home. (See accompanying article.)

• Canada and other developed nations will be able to earn credit toward their national emission reduction commitments from emission reduction projects in the developing world. There is a risk that the credits given will exaggerate the impact of a project and that credit will be given for projects that would have occurred anyway. Either will negate the impacts of Canada's emission comittments. (See accompanying article.)

• Australia is allowed to count net emissions from land clearing and forestry in its baseline year for carbon dioxide (1990). This will allow Australia to increase energy- related emissions.

• 1995 can be used as a baseline year for three trace greenhouse gases. This will decrease the significance of the reduction commitments.

The combination of lax target and loopholes mean that Kyoto, by itself, will have little impact on averting climate change. (See accompanying article.)

On the positive side, while in Kyoto, environmentalists worked hard to ensure that any inclusion of carbon and soil sinks would not redude the effectiveness of the Protocol. Environmentalists were largely successful in their campaign to ensure that countries are not allowed to count forest- related carbon removals in a way that would allow real emissions to increase eight percent above the agreed levels. Countries will only be able to get credit for removals of carbon by forests where they have, since 1990, afforested an area or converted an area from agriculture to forest. This will offer some flexibility but will not eviscerate the agreement.

A final notable aspect of the Kyoto Protocol is what is not included: there is no process by which developing nations will become subject to binding commitments. Emission reduction commitments only apply to those countries in Annex 1 of the Framework Convention on Climate Change, essentially the developed nations of the OECD and former Soviet bloc.

During the Kyoto negotiations, both the European Union and the developing world had opposed anything aimed at including the developing world. While recognizing that successfully limiting climate change would eventually require placing emission limitations on developing countries, the EU argued that it was first necessary for the wealthy high emitting countries to prove their willingness to curb emissions. The industrialized world emits at a far higher rate than the developing world; for instance, Canada's per capita emissions are almost four times the global average and sixteen times India's per capita emissions.

The US and most other non-EU developed nations supported a mandate to negotiate post-2012 emission limitations for relatively industrialized developing countries. Proposals were also made for a mechanism whereby developing countries could voluntarily agree to emission limitations. Both these proposals were defeated by the main developing country bloc.

It is not clear how the US will respond to this defeat. Likely, the US administration will attempt to achieve some developing country commitment prior to ratifying the Protocol.

The full text of WCEL's brief on Kyoto to the federal government can be found at WCEL's website at http://vcn.bc.ca/wcel.

Climate Change Pact Negotiated, But Will It Change Climate?

As the ink on the Kyoto Protocol dries, new scientific findings add increasing urgency to the question of whether or not the Kyoto Protocol goes far enough in reducing greenhouse gas emissions. The commitments of Canada and other industrialized nations are significant and represent a step forward. But they contrast with what is needed to stop human-induced climate change. To actually stabilize concentrations of greenhouse gases in the atmosphere at today's levels requires an immediate sixty percent reduction in carbon dioxide emissions.

What will the impact of the Kyoto Protocol be on climate? Prior to Kyoto, British researchers projected the effects of the European Union's proposal for a fifteen percent emission cut by 2010. The EU proposal, although significantly stronger than what was agreed to at Kyoto, only limited warming to 1.1°C by 2050 and 1.7°C by 2100. By comparison, the researchers estimated that global mean temperature would increase by about 1.2ºC by 2050 and 1.9ºC by 2100 if emissions remained uncontrolled.

1997 warmest year on record

While the Kyoto Protocol is a step in the right direction, the inadequacy of commitments has been underlined by separate January 1998 reports from both NASA and the US National Oceanic and Atmospheric Administration that 1997 was the warmest year on record. This was based on land and sea surface temperatures. Satellite measurements of cooler temperatures in the middle atmosphere are also consistent with human-induced climate change.

Other scientific findings also add urgency to the call for rapid reductions in greenhouse gas emissions. Projections of global average temperature assume that climate will respond gradually to increased greenhouse gas concentrations. They assume that there will be a "linear" response proportionate to increased atmospheric concentrations. In fact, scientists have recently been finding increasing evidence that climate change has been extremely sudden and rapid in the past, and they warn that climate change may not be linear. Human emissions of greenhouse gases may push the earth across climate thresholds which lead to unpredictable, rapid and dramatic non-linear climate shifts. We will not know where these thresholds are until we cross them.

Safe landing corridors

During negotiations leading up to Kyoto, international researchers calculated various "safe landing" corridors. These corridors represent scientists' best estimates of what emission reductions are necessary by the year 2010 in order to avoid both changes in climate that are too extreme and emission reductions after 2010 that are unrealistically rapid. These safe landing corridors provide no assurance that we will not push the earth across the threshold to a dramatic new climate system, but they are the best way of judging the effectiveness of proposed emission limits. The most conservative definition of a safe landing involves avoiding, over the next century:

• global temperature increases of more than 1°C because of human interference,

• rates of change more than 0.1°C per decade,

• sea level increases of more than 0.2 metres, and

• the need for emission reductions of greater than two percent in any year.

This safe landing corridor still allows extremely rapid increases in temperature. But to stay within this safe landing corridor, the Kyoto Protocol would need to have required emission reductions from the developed world of 37 percent to 64 percent from 1990 levels by 2010. The emission reduction commitments in the Kyoto Protocol will mean that rates of climate change in the next few decades will likely exceed the safe landing corridor rate of 0.1°C and that future emissions reductions will need to both more rapid and deeper.

A very small first step

Given the building evidence of human-caused climate change and warnings of the potential for sudden change, it is clear that Kyoto Protocol commitments are a first but very small step in reducing emissions. Deeper cuts will be necessary from high emitters like Canada, and relatively wealthy developing nations will also eventually need to limit their emissions.

International Emissions Trading Systems May Create Loopholes

The Kyoto Protocol establishes a system for international emissions trading between developed nations. Unfortunately, depending on the outcome of post-Kyoto negotiations, trading mechanisms may create major loopholes that will reduce the effectiveness of the Protocol.

In theory, trading allows nations who can reduce emissions at a low cost to reduce their emissions below their allowable limits and sell their surplus emission quotas to other parties, thus reducing the overall cost of compliance but achieving the same end. In practice, depending on the rules that are eventually established for trading, trading could severely reduce the effectiveness of the Protocol. According to some estimates, the emission trading mechanism could allow the United States to meet half of its emission reduction commitments without any real emission reductions occurring anywhere by buying up quotas from other nations.

Joint implementation provisions

The Kyoto Protocol includes two mechanisms for emissions trading among nations with binding emission reduction commitments (the Annex 1 nations). Under so-called joint implementation provisions, an Annex 1 nation can, with the approval of another Annex 1 nation, claim credit for emission reductions projects in the second country. As a result of the trade, the allowable emission quota of the second nation is reduced and the quota of the first nation is increased.

The Protocol also states that the nations with binding emission reduction commitments can participate in emissions trading for the purposes of fulfilling their emission reduction commitments, but leaves the rules of trading to be worked out in the future. Under this provision, nations may trade allowable emissions, but need not show that the trade reflects emission reductions achieved by a particular project.

Trading hot air

From an environmental perspective, the biggest problem with trading is the trading in "hot air." Eastern European nations have emission quotas for the 2008 to 2012 compliance period that exceed their likely emissions under a business as usual scenario. For instance, Russia and the Ukraine are both allowed to emit at 1990 levels in the compliance period.

However, due to the collapse of their economies, emissions are currently far below 1990 levels. Russian carbon dioxide emissions are currently only 74% of 1990 emissions. This is only projected to increase to between about 80% and 90% of 1990 levels by 2010.

Under trading rules supported by most non-EU developed nations, eastern European nations would be able to sell surplus allowable emission quotas. Trading these surplus quotas will allow nations buying the quotas to increase their emissions while the nations selling them do nothing to reduce emissions. In the case of Russian, the sale of surplus Russian emission quotas alone could allow other Annex 1 nations to increase their collective emissions by roughly four percent above commitments.

The result may be a quick infusion of cash into Russia, but it does not reduce emissions, and it provides no incentives for businesses or governments to invest in projects that will actually reduce emissions and aid the Russian economy in the long run. A better option would be if nations are only allowed to sell emission quotas where they have undertaken a project to reduce greenhouse gas emissions. In this model, businesses would have an incentive to invest in projects that would both make the Russian economy more efficient and be good for the environment. There would be an incentive to invest in profitable emission reduction measures that abound in the notoriously inefficient Russian economy.

Seller beware

Another concern with trading is that trading mechanisms that are evolving are "seller beware" systems. Under a seller beware system, a country purchasing international emission quotas need not be concerned that a nation selling its quotas is in compliance with emission limitations. A nation could potentially continue emitting at well over 1990 levels but sell all of its emission quotas. A nation buying the quotas would then be able to increase emissions and maintain compliance. The net effect is to allow the environmental effects of one nation's breach of international law to multiply and undermine the whole system.

Seller beware is particularly problematic given the lack of effective sanctions for nations that are out of compliance. A seller beware trading system is like a money system in which it is legal to use counterfeit money and, while counterfeiting is nominally illegal, there are no consequences to getting caught.

Clean Development Credits: demonstrating low carbon development, or Kyoto's biggest loophole

Under the so called "clean development mechanism," the Kyoto Protocol permits nations subject to international emission limits to gain credit for emission reduction projects in countries not subject to such limits. (Due to their low per capita emissions, developing countries are not subject to emission limits under the Kyoto Protocol). Businesses in the developed world can claim credit for emission reduction projects that they invest in or undertake in the developing world.

According to its promoters, the clean development mechanism will reduce Canada's and other developed nations' emission reduction costs. Due to the use of outdated and inefficient technologies in the developing world, there are many potentially profitable emission reduction projects in developing nations that are not being implemented.

Low carbon futures

The mechanism is also intended to demonstrate the potential for low carbon economic development to the developing world. Demonstrating the compatibility between a low carbon future and economic development is an essential step in the process of getting developing countries to accede to emission reduction commitments.

Finally, promoters of the clean development mechanism argue that it will help reduce investments in technologies that lock developing countries into high emission rates. For rapidly industrializing nations like India and China, the types of investments being made at this stage of their development tend to lock these countries into a longer term patttern of high emissions as compared to investments being made in the developed world. Today's investment patterns will affect the ability of developing countries to sign future commitments to significant emission limits. It is argued that the clean development mechanism will help avoid investments that lock the developing world into high emission patterns.

Giving credit where credit isn't due

While the clean development mechanism may help developing country move to sustainable development, it may also weaken the effectiveness of the Kyoto Protocol. One of the main weaknesses of the Protocol is the likelihood that, under the clean development mechanism, credit will be given for projects which would have occurred in the absence of the mechanism. Clean development credits will be given for certified "reductions in emissions that are additional to any that would occur in the absence of the certified project activity." The parties responsible for certification of emission reductions and the process for certification are yet to be determined.

The requirement for "emissions additionality" does not require a clean development project to be something that would not have occurred without the mechanism. Therefore, credit could potentially flow from a project that reduces emissions but would have occurred anyway. If credit is given for such a project, and is used to avoid making an emission reduction in Canada, the net effect is to undermine the significance of Canada's emission reduction commitments.

The problem of credit being given for projects that are not additional is inherent in any system for generating credit outside of nations subject to binding limits. It is acute because many of the emission reduction projects for which credit is given are profitable or worth doing for reasons such as reducing local air pollution. Projects which reduce emissions occur all the time; they simply do not occur in the numbers to counteract the general trend to higher emissions.

Establishing baselines

The other problem with the clean development mechanism is the difficulty of trying to measure emission reductions from a specific project. Emission reductions must be measured from a baseline that represents emissions in the absence of the project. How that baseline is set, and how emission reductions are measured, are inherently difficult issues and can potentially lead to a project being given far greater emission reduction credits than it actually achieves.

The best way to mitigate the problem of credit being given for projects that would have occurred anyway, and to ensure that credit is only given for real emission reductions, is to establish stringent criteria for setting baselines and measuring emission reductions. Baselines should reflect good practices, with credit only given for emission reductions that go beyond good practices. A stringent approach to baseline setting and measuring reductions will not cure the problem of credit being given for projects that are not additional, but it can make this problem less acute.

Finally, nations can bank credits for emission reductions that occur from clean development projects between 2000 and 2007. Although this will help spur some early action, it will also create a stockpile of banked credits — many of them likely derived from projects that would have occurred anyway — that can be used to avoid greater emission reductions in the period after 2007. If there was no mechanism for banking credits, many emission reductions would have still occurred prior to 2008, but the banked credits will mean that global emissions will be higher during the commitment period.

...announcing a timely report of interest to anyone concerned about climate change and greenhouse gas emissions...

TURNING DOWN THE HEAT:

Emissions Trading and Canadian Implementation of the Kyoto Protocol

by Chris Rolfe

Turning Down the Heat is intended to assist in the search for ways to reduce Canadian greenhouse gas emissions. It examines the potential role for emissions trading in implementation of Canada's greenhouse gas emission reduction commitments under the Kyoto Protocol.

What is Emissions Trading?

Under trading programs, individual polluters are given flexibility in how to reduce their emissions. Where an emitter can, at a low or negative cost, reduce emissions or energy use beyond what is required by regulation they can sell an emission reduction credit or an allowance to a polluter who cannot reduce their emissions as easily. The purchaser of the credit or allowance is then allowed to emit more. The theory of emissions trading assumes that by placing increased choice of control measures in the hands of emitters, emissions will be reduced at the lowest cost.

Emissions trading has often been promoted as a panacea, an alternative to regulation, and a new way to reduce emissions that will be politically easy and achieve emission reductions at the lowest cost. This report finds that, while there is potentially a large role for emission trading, it is none of the above. It is one tool — albeit a potentially important one — among many to reduce greenhouse gases.

Who Should Read Turning Down the Heat?

Turning Down the Heat will be of interest to anyone concerned with climate change and how greenhouse gas emissions can be reduced:

• Academics, Students and Interested Citizens. For those interested in understanding climate change the report gives an introduction to the science of climate change, its impacts, and different perspectives on the economics of reducing greenhouse gas emissions. It provides background on Canadian emission sources and the development of provincial, national and international response strategies to climate change. It analyses the pros and cons of using broad market based approaches to reducing greenhouse gas emission versus use of narrowly focused regulatory interventions.

• Federal and Provincial Policy Analysts. The report analyses the pros and cons to various approaches to reducing greenhouse gas emissions in Canadian jurisdictions; the demands different forms of emissions trading will place on enforcement and administrative resources; the extent to which different forms of emissions trading send efficient price signals to business and individuals; the policy choices that will need to be made in developing trading programs; how elements of emission reduction programs can affect costs borne by different sectors; ways of overcoming weaknesses in different program designs; and the constitutional and legislative basis by which a national greenhouse gas strategy can be put into law.

• Environmentalists. The report analyses the environmental risks and advantages of different forms of emissions trading; the elements that are needed to make a emissions trading program environmentally effective; and the experiences of other jurisdictions in implementing emissions trading in the real world.

• Industry. The report discusses the impacts of different emission reduction strategies on costs borne by different sectors; the transaction and monitoring costs businesses will face under different emission trading programs; and the roles and limitations of voluntary emission reduction initiatives.

Turning Down the Heat is available from the West Coast offices; copies are $40 each (or $30 for WCEL members). Call our offices for details, or visit our website for ordering information.

The Rule of Law and Other Impediments to the MAI

In the reign of King Henry the VIII, Parliament abolished the Star Chamber, an all powerful and secretive court used to punish the enemies of the King. In the reign of Elizabeth II, the Prime Minister is poised to revive the traditions of that ancient court to punish the enemies of capital mobility. But the disturbing parallels between the investor-state suit provisions of the Multilateral Agreement on Investment (MAI) and the Star Chamber would no doubt come as a surprise to supporters of this investment treaty. They have been much too focused on the rights of investors to notice the broader societal implications of their actions.

To understand how an assault on the bedrock principles of our justice system could be an unintended consequence of MAI negotiations, one needs to consider where the dispute resolution regime of this investment treaty came from. As many will know, binding arbitration is now the dispute resolution process of choice for many commercial contracts. Agreements that adopt this approach run the gamut from collective labour agreements to international contracts between corporations and governments. To provide for such dispute resolution in the international context, various commercial arbitration processes have been established by the World Bank, the International Chamber of Commerce and the United Nations.

It is not surprising then that the drafters of the MAI would look to such mechanisms when searching for a model for dispute resolution. Thus, under the heading "investor-state dispute settlement," the MAI proposes to extend the principles of international commercial arbitration to disputes between individual or corporate investors and nation states. What appears to have gone overlooked is just how different investor claims under the MAI would be when compared with disputes between parties to private commercial contracts.

In broad terms, the investor-state suit provisions of the MAI, and the precedents upon which they rely, extend the principles of international commercial dispute resolution to a vast and new array of potential disputes that have very little to do with international legal commercial contractual relationships. In effect, the MAI would provide foreign investors with a large number of new substantive rights. To ensure that governments respect their rights, investors would also be given the right to invoke binding international arbitration before tribunals with considerable power, including the authority to award damages.

Moreover, these rights will be available to an unlimited and unknown number of foreign investors even though most would have no contract with, nor obligation to, the government against which they may be making a claim.

Now, encouraging private dispute resolution among parties to commercial and contractual arrangement makes good public policy sense. Absent an overriding concern (eg. a contract for an illegal purpose), society has no more interest in these disputes than it has in private contract negotiations. But when disputes involve the exercise by governments of their policy and legislative prerogatives in the broadest sense, there is an overwhelming imperative that such disputes be resolved by public institutions, established fully in accordance with constitutional principles and the rule of law.

Viewed in this light, the investor-state procedures of the MAI represent a truly radical departure from the most basic tenets of our judicial system. To illustrate: we all know that our courts are first and foremost public institutions which have been established and operate under Canadian law firmly rooted in our constitution. Judges are appointed by government and proceedings are open to public scrutiny, and on many occasions, to public participation as well. Decisions are reported and our courts are bound by Canadian legal principles and judicial precedent. Finally, our Parliament and Legislatures can amend our laws if they conclude that the courts got it wrong.

In stark contrast to these democratic judicial processes: MAI arbitration panels would operate under the auspices of international institutions; proceedings would take place behind closed doors; and, there would be no public right to the evidence upon which a decision would be made. Panels would not be bound by judicial precedent, but would be obliged to apply international legal principles even where these have no foundation in Canadian law. Finally even the authority of Parliament to overrule an arbitration panel would be severely curtailed by MAI rules that effectively impose a fifteen to twenty year waiting period should a government conclude that the price of securing investor rights is simply too high to pay.

Arguably, the first fundamental mistake engendered by these elements of the MAI was the assumption that a regime designed for resolving legal commercial claims could be applied, without modification, to public policy disputes between foreign investors and Canadian governments. But, even were one to concede this point (we would not), this would still leave unanswered the question: what conceivable rationale is there for a model of dispute resolution that is so secretive that it makes the Star Chamber look accountable by comparison?

One further point should also be made, and that concerns the way in which investor-state suits represent a radical departure from the norms of dispute resolution that apply under international trade agreements which, with the exception of NAFTA's investment rules, provide for no analogous investor rights.

Conventionally, only national governments have standing to invoke dispute resolution processes under international trade agreements. For this reason, national governments have often acted to constrain the appetite of their domestic corporations to assail the policies and practices of other governments. But under the MAI, a corporation need no longer persuade any government of the legitimacy of its complaint before seeking enforcement under this proposed treaty.

Thus, Canada is proposing to concede to all foreign investors the unilateral right to invoke the dispute resolution machinery of the MAI without any constraint and no matter how specious or ill-founded their claims may be. While any particular claim may fail, simply the demands that such claims exert on scarce government resources is more than sufficient to cause governments to pause or withdraw in the face of such complaints, no matter how compelling the public policy rationale for proceeding may be.

Because investor state suits are a feature of NAFTA, we have been able to observe over recent years how they can be used to challenge government initiatives on issues as diverse as restricting the trade of a toxic fuel additive, mandating plain packaging for cigarettes, and permitting hazardous waste facilities. These cases have brought to light just how far reaching these investment regimes may be in constraining the policy and legislative authority of democratically elected governments.

From all of this, one might be tempted to read into the provisions of the MAI, and its precedents, some sinister intent to undermine the integrity of our justice system or the sovereign authority of our government. More likely, however, these and other aspects of this investment treaty are only the product of the myopic fixation of trade bureaucrats and business groups intent of making the world a more hospitable place for investors. Because the MAI negotiating process is such a secretive and cloistered one, there is no one present to temper this single-minded preoccupation with narrow economic policy objectives.

However, if in consequence of entering into such agreements we fundamentally erode the very democratic foundations of our society, it will be of little consolation that our undoing was an unwitting indifference to such consequences rather than the result of some insidious conspiracy.

— Steven Shrybman

Many thanks to Bill and Joan Paterson for their generous support of our work on the MAI.

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