The Kyoto Protocol: Can Annex B Countries Meet Their Commitments?

American Council for Capital Formation
October 1999

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By Mary H. Novak, senior vice president, WEFA Energy Services. This Special Report is based on a paper prepared for an October 13, 1999, policy conference, and will be published in the ACCF Center for Policy Research's upcoming book, The Kyoto Commitments: Can Nations Meet Them With the Help of Technology?

Summary

The Kyoto Protocol sets the ambitious target of reducing greenhouse gas emissions to 5 percent below 1990 levels by 2008-2012 for 38 industrialized countries including the United States. A review of five recent government studies and one independent report by WEFA Energy analysts in Europe shows that the industrialized countries of North America, the Pacific region, and Western Europe cannot meet their emission targets without exorbitant carbon taxes. In addition, the use of "Kyoto mechanisms" would only reduce the cost if the emissions credits were plentiful relative to the total requirement of countries vying for them. At issue is whether Eastern Europe's plans for economic growth will leave them with any surplus credits to sell. While Western Europe's leaders have adopted the "spirit" of Kyoto, their primary goals are job growth and economic expansion.

Introduction

The Kyoto Protocol to the Framework Convention on Climate Change, a proposed amendment to the international treaty on mitigating the risk of global warming, sets the ambitious greenhouse gas emission target of 5 percent below 1990 levels by 2008-2012 for 38 industrialized countries including the United States. Many studies have shown that it would be extremely costly for the United States to achieve its target. Even under the assumption that the United States could take advantage of the flexibility mechanisms proposed in the Protocol to reduce the cost of compliance, the impact on U.S. consumers and businesses would still be substantial.

The United States is but one of the 38 countries in Annex B to the Kyoto Protocol that face the challenge of meeting the targets established for reducing greenhouse gas emissions by the end of the next decade if the Protocol is ratified.¹ Proponents of the Protocol have claimed that these countries can achieve their targets at a low cost.

Are Annex B Emissions Targets Achievable?

Many previous analyses have shown that the industrialized countries of North America and the Pacific region who are signatories of the Framework Convention on Climate Change cannot achieve their Kyoto targets without extensive use of the "Kyoto mechanisms" (i.e., international emissions trading). A review of five recent government studies and an independent report by WEFA Energy analysts in Europe supports the conclusion that the emissions targets cannot be achieved without exorbitant carbon taxes or extensive use of Kyoto mechanisms.² The range of estimates of the required reductions in emissions from baseline levels for North America is -21.3 percent to -29.8 percent (see Table 1 and Figure 1a). The estimates for the Pacific region (Japan, Australia, and New Zealand) are equally draconian: -18.5 percent to -28.5 percent (see Table 1 and Figure 1b).

Figure 2	Change in CO2 Emissions Needed to Meet the Kyoto Targets in 2010 Percent change from baseline
*IEA estimates do not separate Eastern Europe and the former Soviet Union.

Figure 2	Change in CO2 Emissions Needed to Meet the Kyoto Targets in 2010 Percent change from baseline
*IEA estimates do not separate Eastern Europe and the former Soviet Union.

The assessments of Western Europe's potential for reducing carbon emissions from its energy sector as required to meet the Kyoto Protocol targets by the end of the next decade are uniformly pessimistic (see Table 1 and Figure 2a). Even the prospects for incorporating Eastern Europe in its "bubble"³ do not support proponents' views that the target can be achieved through inexpensive measures (see Table 1 and Figure 2b). Also, except for the analysis prepared by the EIA, the analysts of Europe do not report a readily available surplus of emission credits from the former Soviet Union (see Table 1 and Figure 2c).

Nor do the numbers prepared by European analysts for European policymakers support the extensive use of the Kyoto mechanisms. These measures would only reduce the cost if they were plentiful relative to the total requirement of countries vying for them. Given the projected demand for energy to meet economic growth objectives, the industrialized countries of Annex B would have to pay dearly to attract credits from countries focusing on economic growth.

Comparison of the Studies: Similarities and Differences

Similarities

The five government and one independent studies whose results are summarized above reach the same conclusions about several key points:

First, the studies show the required reduction in carbon emissions from the energy sector is very large, even though each country is gaining in energy and carbon efficiency; and all of the studies reviewed are pessimistic about the prospects for the United States, Canada, Japan, Australia, and New Zealand meeting their Kyoto targets without relying on extraordinary measures (such as carbon fees) or trading.

Second, the studies stress that carbon dioxide emissions are related to all facets of energy use in the economy, that energy is fundamental to improving economic performance, and that energy and carbon efficiency are difficult to improve further in the short- to mid-term due to the cost and longevity of energy-using capital equipment.

Third, the studies stress that there is a limited opportunity for technological innovation, demonstration, commercialization, and acceptance in the short time period before 2008-2012. And, importantly, they stress that the reduction in carbon emissions that would be necessary to meet the goals may require leap-frogging technologies or technological invention, both problematic and expensive.

Fourth, the studies reiterate that there is substantial risk that the gap between the Kyoto targets and baseline forecasts may be larger due to risk of more nuclear energy retirements. For example, in the forecast prepared by the European Community in 1996, Sweden was projected to retire all of its nuclear capacity before 2010.

Finally, the studies conclude that the prospects for meeting the reduction targets through additional fuel substitution (gas for coal or petroleum) are small as the baseline assessments already show significant increases in gas use. These baseline estimates require staggering financial resources and significant political will to bring them to fruition. Due to their overwhelming positive attributes-increasing fuel diversity, higher capital efficiency, environmental benefits at point of combustion-the baseline estimates for increasing gas use are too optimistic. Scheduled projects may be achieved, but more are unlikely to be developed over this period.

Differences

The studies are all pessimistic about the prospects for Western Europe meeting its target, although there is less unanimity in the assessment of the change from baseline that would be required to meet the target. For example, the estimates for Western Europe may face even greater changes as the baseline forecasts include substantial developments in natural gas supplies and transportation and little change in the region's reliance on nuclear energy.

A very notable factor is the analysts' differing views of Eastern Europe and the former Soviet Union. As discussed above, most analysts are pessimistic about the availability of credits from these countries. The fundamental desire for broad-based economic growth is viewed as the likely path for these economies. Energy-intensive products, including electric energy, created with domestic fossil resources are expected to be key components of long-term economic expansion and job creation.

On the other side is the optimistic view of carbon credit availability in the U.S. Energy Information Administration's assessment. Although intrigued, economists in Europe do not share this view of the economies in transition. In general, the other assessments reflect the consensus view that Eastern Europe and the former Soviet Union must first find a path to economic expansion. This path requires energy and can include electric energy as an exportable product.

Another major divergence in the studies' results arises from the difference between the EU and U.S. positions on the use of the Kyoto mechanisms. Much of the Clinton Administration's analysis has assumed an extensive use of these mechanisms. The assessment by the Energy Information Administration states that emissions trading may reduce the burden of carbon dioxide reductions and minimize the cost to Annex B economies while allowing the countries to meet the Kyoto target.
On the other hand, the European Commission has supported limited, transitional use of emissions trading. A key point of departure is the difference in the outlook for Eastern Europe and the former Soviet Union. But the difference in the outlook also reflects a very fundamental divergence in regulatory approaches between Europe and North America.

Technological Innovation: Key to Economic Growth and CO₂ Emission Reductions

It is apparent from their self-evaluation and their dialogue with North American and Pacific governments that the development of strong, self-sufficient economies in Europe and North Africa is Western Europe's primary goal. While the leaders of Europe have generally adopted the "spirit" of Kyoto (reducing greenhouse gas emissions due to the risk of global warming), their commitment is subject to meeting other-perhaps more primary-goals, such as political and cultural security through economic prosperity for the countries of Europe and its neighbors.

This sentiment is illustrated by the following quote from the European Commission's Directorate for Energy special report "European Energy to 2020" (Spring 1996) by Christos Papoutsis, then commissioner responsible for energy:

Energy is the lifeblood of economic activity and the key to social and personal welfare! ... [O]ur energy policy must reconcile security of supply, environmental protection, and overall competitiveness through both progressive market liberalisation and the development of new technologies in the energy field. It must also reply to the European Union's central concerns for job creation and the quest for greater efficiency in the business environment.

The authors of the six studies described above are unanimous in their assessment of the inability of Annex B countries to meet the emissions targets set in the Kyoto Protocol without very large carbon taxes or extensive use of mechanisms such as emissions trading. Emissions trading will result in substantial transfers of wealth and result in an indirect tax on carbon use. The authors and policymakers state their support for a longer-term technological response to global warming risk mitigation as the appropriate path.

Conclusions

The results of the comparisons of the six studies may be summarized simply: all report a large gap between their baseline assessment of carbon emissions and the Kyoto targets.

Europe has told the world that they are committed to the path of reducing greenhouse gas emissions through country or regional mechanisms such as performance standards. It is culturally comfortable for them, allows for the integration of their desire for environmental sensitivity (particularly post-Chernobyl), and allows for the economic performance necessary--for them and for their eastern and southern neighbors--for integration and security.

But can Western Europe meet their Kyoto targets through the aforementioned mechanisms and without strict compliance penalties? No. They can make some progress, perhaps substantial progress, following this path, but they cannot achieve a binding goal. Moreover, since the stated goal is to propose further reductions beyond the Kyoto targets, the problem will continue to grow.  

Endnotes

1. Annex B countries (from the Kyoto Protocol) are essentially the same as Annex I countries (from the Framework Convention on Climate Change). There are some differences; for example, Belarus and Turkey are not included in Annex B. Annex B countries are: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Ukraine, United Kingdom of Great Britain and Northern Ireland, and the United States.

2. World Energy Outlook, International Energy Agency/OECD, Paris, France, 1998. [OECD/IEA98]

Energy in Europe, European Energy to 2020, European Commission Directorate General for Energy (DG XVII), Brussels, Belgium, 1996. [EC96].

International Energy Outlook 1999, U.S. Department of Energy, Energy Information Administration, Washington, D.C., March, 1999. [USDOE/EIA99].

Economic Impacts of the Kyoto Protocol: Accounting for the Three Major Greenhouse Gases, ABARE (Australian Bureau of Agricultural and Resource Economics). May 1999. [ABARE99].

APEC Energy Demand and Supply Outlook, Asia Pacific Energy Research Centre, Tokyo, Japan, updated September 1998. [APEC/APERC98]. APEC covered only the Pacific Rim countries that are members of APEC and did not provide statistical assessments comparable to the other studies cited in this report.

The Kyoto Protocol: A Reality Check, WEFA, Ltd., 1998. [WEFA98]

3. Groups of countries are allowed to treat their aggregate quantified emission limits as a single party (acting under a "bubble"). For example, this provision allows the EU countries to operate under the long-declared EU "bubble"--individual country emissions can be above or below the 92 percent of the 1990 level target as long as the EU aggregate achieves the targeted level.