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Kyoto Lobby Kills Small Business

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Kyoto Lobby Kills Small Business

Credit for early action — a policy proposal developed by the Environmental Defense Fund, warmly embraced by the Clinton-Gore administration, and championed by. Rhode Island Republican Senator John Chafee, — is the latest ploy in the Kyoto lobby's strategy to divide and conquer the American business community. Early action crediting would jump start implementation of the non-ratified United Nations global warming treaty while increasing the number of companies amenable to ratification. Opponents rightly call the scheme Kyoto Lite.

Although the mechanics of an early action program are complicated, the basic idea is quite simple. Companies that reduce their energy-related emissions before 2008 — the year when a ratified Kyoto Protocol would go into effect — would earn credits they could later use during the first (2008-2012) Kyoto compliance period.

Any such program would fuel an upsurge in pro-Kyoto business lobbying. Credits earned under the program, although potentially worth millions or billions of dollars, would actually be worthless unless Kyoto, or a comparable regulatory program, were ratified or adopted. Consequently, participating companies would acquire financial incentives to support ratification.

Early action crediting is not an attempt to implement Kyoto through the backdoor of sneaky regulation. Rather, it is an in-your-face plan to implement Kyoto through the legislative front door. Early action crediting openly rewards compliance with Kyoto and is openly tied to ratification. As Mr. Chafee explained last October when he first introduced an early action bill: The credits would be usable beginning in the first five-year budget period (2008-2012) under the Kyoto Protocol, if the Kyoto Protocol is ratified.

Supporters describe early action crediting as a voluntary program, but the plan contains sticks — perhaps even fangs—as well as carrots. In the first place, the Environmental Protection Agency would likely be the administering agency. If EPA officials broach the topic of early action with a company over which they have inspection, permitting, or enforcement authority, how could the discussion not involve an element of coercion? Even if EPA scrupulously refrained from behind-the-scenes intimidation, companies might volunteer just to stay on the good side of their regulatory overlord. 

Furthermore, even if not run by EPA, an early reduction program would put the squeeze on many companies to volunteer, because early reducers would profit at the expense of non-participants. The latter would not merely forgo benefits — they would be penalized.

Here's why. The Kyoto Protocol assigns to every industrial nation an emissions budget — a fixed quantity of emission allowances or credits it may lawfully use during 20082012. Under Kyoto, an industrial nation can earn emission credits, and thus increase its budget, by implementing early reduction projects in developing countries. However, early reductions achieved at home do not generate bankable credits that can later be added to a nation's budget. Thus, credits for domestic early action can come from only one place —the future U.S. Kyoto budget. The inescapable result is a zero-sum game. For every company that gains a credit for early action, there must be another that loses a credit in the compliance period.

Since early reducers are rewarded at the expense of nonparticipants, many businesses that otherwise would never dream of volunteering may do so just to avoid getting stuck in the shallow end of the credit pool, come 2008. This dynamic is, of course, exactly what Kyoto partisans desire, as it would build up the mass of companies holding costly paper assets that are completely valueless unless Kyoto is ratified.

Who would be hurt the most? The answer is really quite obvious. Only the big boys — utilities and major manufacturing firms — have the legal and technical expertise and the discretionary capital to invest in voluntary emission reduction projects. Most small businesses will not be players in the early credit game. Yet in a Kyoto world, all small businesses will have to pay higher energy costs and many will have to reduce their use of fossil fuel. Credit for early reduction would not only make Kyoto more likely to be ratified, it would also make the treaty more costly for small business.

The strongest rationale for an early action program is Florida Republican Senator Connie Mack's 'precautionary' argument. Mr. Mack, an original cosponsor of the Chafee legislation, warns that a future Congress might ratify Kyoto or mandate energy-use controls. An early reduction program would allow participating companies to stretch out their compliance costs and thus, Mr. Mack contends, buy a kind of insurance against possible future regulatory excess.

This argument does not survive inspection. Enacting an early action program would send a strong message to the business community: Congress believes Kyoto ratification is inevitable, and American companies had better get prepared for it. That message —the Kyoto Express cannot be stopped — could easily become a self-fulfilling prophecy. Many businesses would conclude, if you can't lick 'ern, join 'em. By strengthening the Kyoto lobby, early action crediting would feed the very regulatory ambitions Mr. Mack professes to oppose.

Early action crediting may seem like a voluntary, market-oriented, win-win environmental program. It is actually a political strategy to implement a non-ratified treaty and grow the Kyoto lobby. And it would produce a zero-sum game in which small business can only lose. Policy makers cannot consistently claim to oppose Kyoto and support early action crediting.