Introduction

In response to the demand by developed countries, many developing countries are generating carbon credits for sale through the existing market mechanisms. However, these developing countries may unknowingly be selling their low-cost emissions reduction options and locking themselves into having to use higher cost options to accomplish their own emissions reduction pledges in the future. This article explores the role of the carbon markets in the context of current trends in multilateral climate negotiations and highlights the risk of rushing to cash-in low-cost emissions reduction credits.

Following the failure of the climate talks at the 15th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) in Copenhagen in December 2009, Parties began the arduous process of rebuilding trust in 2010. Through patient and delicate negotiations, Parties have managed to agree on a process that would take Parties through the crafting of a strategic set of COP decisions at Cancun, Mexico, with a view to achieving a legally binding agreement in Durban, South Africa at the 17th COP in 2011.

However, several disturbing trends have emerged in the negotiations. First, there are unambiguous signs that a significant number of developed country Parties no longer support a second commitment period (post 2012) to the Protocol. There are also signs that developed countries are distancing themselves from the principles of the Convention. Finally, there is a strong pressure for international carbon markets to play a greater role in future climate agreement regimes. These factors in combination paint a bleak picture of the future of an international multilateral climate policy as driven and influenced by developed countries.

A Protocol in peril

With two years remaining in the first commitment period (2008 – 2012) of the Protocol, it is evident that developed countries have had mixed success in achieving their emissions reduction targets. This has occurred in spite of the established flexibility mechanisms and the accounting loopholes in Land Use, Land Use Change and Forestry (LULUCF).

It is not surprising, therefore, that negotiations for the second commitment period of the Kyoto Protocol have been fraught with difficulty.

The US, having unfairly evaded commitments during the first commitment period, has maintained that it will have no part of the Kyoto Protocol, and that without a Congressional mandate; it will be unable to declare any more than a token emissions reduction pledge in any new legally binding agreement. Other developed countries, taking the cue from the US, are distancing themselves from the second commitment period of the Protocol and shifting the mitigation burden to developing countries. These collective positions and demands not only impact the functionality of the Protocol by decreasing the level of ambition of other developed countries, but also profoundly undermine the principles of the Convention.

A Convention in crisis

Also distressing is the developed countries’ gradual dissociation from the UNFCCC itself. This is because the principles of the Convention affirm the historical role of the developed countries as the primary emitters of greenhouse gases (GHGs) and differentiate countries according to common but different responsibilities. Furthermore, the Convention appreciates the priorities of developing countries to eradicate poverty and raise the living standards of their people.

Ultimately, the primary basis of the Convention is the link between development, wealth creation and the generation of GHGs, coupled with the fact that GHG emissions by the developed countries since the beginning of the industrial revolution are now affecting global climate and adversely impacting the lives of all peoples, particularly those least able to protect themselves from it. Some developed countries are now demanding that all Parties should have emissions reduction commitments, in effect, de-linking historical emissions of developed countries from our current climate predicament and shifting the emissions reduction burden to developing countries even while their per-capita emissions remain far below those of the developed countries. This will most certainly retard development, which, as mentioned above, is recognised as a priority under the Convention. Once again, these collective positions taken by the developed countries are unprecedented and clearly an attempt to subvert the principles of the Convention.

The current state of negotiations

In Cancun, the EU and the Environmental Integrity coalitions agreed to move firmly toward a second commitment period of the Kyoto Protocol, but only if the US and the rest of the Umbrella Group take on comparable reduction targets, and the major emitting developing countries implement emissions reduction actions. These positions support the Kyoto Protocol and Long-term Cooperative Action (LCA) tracks of the Bali Roadmap agreed to at COP 13 in Bali.

Regrettably, while developing countries were making major concessions on the LCA track, Japan and Russia, in a blatantly retrogressive move, announced that they would not be making emissions reduction pledges for the second commitment period of the Kyoto Protocol. These positions clearly oppose ambitious top-down emissions reduction commitments in favour of voluntary, bottom up emissions reduction pledges of the kind already being implemented by developing countries. In fact, they represent a step backward from the dismal pledges in the Copenhagen Accord, which, from a scientific standpoint, would already allow the increase in average global temperatures to exceed 2°C. Ultimately, the reason for this wish to dissociate from the Protocol and from the principles of the Convention stems from the link between emissions and wealth generation as discussed below.

The link between emissions and wealth generation

Unless we derive our energy from low-carbon fuel sources such as hydroelectric or nuclear power, productivity will most certainly be linked to emissions from the burning of fossil fuels. Even where stationary power sources are non-carbon related, we still use large amounts of fossil fuels for transportation. Therefore, granting a country emission rights is tantamount to granting increased productivity while restricting emissions will restrict productivity. From this standpoint the Protocol, with its legally binding commitments, imposes a significant burden on developed countries.

Faced with this prospect, developed countries would initially reduce non- GDP-linked emissions, followed by emissions marginally related to GDP, leaving emissions closely tied to GDP to the end. Further reduction in emissions would imply not just the specific cost of emissions reduction but also, the opportunity cost, a reduction in GDP, which would impact their economies. For this reason, developed countries have insisted on being allowed to accomplish further emissions reductions offshore, that is, through emissions reductions in developing countries. This, in effect, allows wealth generation to proceed unhampered in the developed countries while the emissions reduction is accomplished at much lower cost through emissions reduction credits that are generated in developing countries and purchased through the markets. If developing countries were not called to reduce emissions themselves, this situation would not be problematic, but the developed countries are already beginning to insist that developing countries should have emissions reduction commitments of their own.

As in developed countries, emissions reductions in developing countries also vary widely in cost. Ideally, developing countries should be implementing the lowest cost options for their own emissions reductions while assigning the higher cost emissions reduction options to be accomplished through financial assistance and technology transfer from developed countries as envisioned under the Convention. Instead, the allure of the carbon market is leading developing countries to use their low-cost mitigation options to generate low-cost emissions reductions for sale on the market when they might actually need these low-cost reductions to meet their own emissions reduction commitments now or in the future. Once these low-cost emissions reductions are sold, they are no longer available to the country to accomplish its own emissions reductions. The developing country will then have to rely on its higher cost emissions reduction options to reduce its own present and future emissions, almost certainly retarding economic growth and adversely affecting development. Meanwhile, the developed countries continue to generate wealth and economic prosperity through the unabated emissions of GHGs.

Avoiding ‘Double Duty Mitigation’

This ‘double duty mitigation’ by developing countries should be a concern to all developing country governments that are currently looking to ‘market mechanisms’ as a means of financing domestic emissions reductions. These market mechanisms represent the most efficient way of ensuring that economic growth remains robust in developed countries while taking advantage of market competition and the already lower cost of emissions abatement in developing countries.

In view of the aggressive marketing strategies of carbon credit brokers and buyers, developing countries, especially those that are already making voluntary emissions reduction pledges, need to be particularly concerned that their low emissions growth strategies take into account the need to ensure that sufficient low-cost mitigation options exist to achieve their own, self-financed emissions reduction pledges before embarking on the development of large-scale emissions reduction projects designed to generate voluminous carbon credits for sale in the competitive carbon markets. Enhancing awareness concerning this issue at all levels of both the public and private sectors will help governments avoid the negative impacts on development in a carbon constrained global economic environment.