Kyoto Lite: Credits for Early Action to Reduce CO2

On Point No. 54


An old joke tells of a young geography teacher seeking a job in a rural backwater during the Great Depression. His interview with the school board went well until one member said, “Son, I think you’ll do, but tell me, do you teach that the world is round or flat?” Desperate for work, and unable to read any cue about the desired answer, the teacher replied, “I can teach it round or I can teach it flat; tell me how you want it and that’s how it will be.”

That is the fundamental attitude of many American businesses toward the controversy over global warming, including the possibility of mandatory reductions in emissions of carbon dioxide, the proposed Kyoto Protocol, and other manifestations of the issue. Much of corporate America figures it can do well either way, as long as governments make up their minds and tell it whether the world is round or flat. Things are not really so simple, though. The climate-change issue is a complex political game, and getting it wrong could have significant effects on a business. Players need to bear in mind some important rules:

The Kyoto Protocol is almost certainly a dead duck. It has lost support even from the scientific and economic academicians who think climate change is real and endorse an activist policy. The Protocol establishes goals that are both unmeetable and undesirable, contains inadequate mechanisms for the emissions trading that might cut implementation costs and has no workable amendment mechanism to improve them, and contains numerous other flaws, major and minor. The Protocol lacked the needed Senate votes for ratification from the start, and as its defects become more apparent support will shrink further.

Responding to this situation, environmentalists and the administration–and on this issue there is no distinction–are thinking in terms of a two-pronged approach. One prong is a come-from-behind effort to resurrect the Protocol. If this proves impossible, then the post-Kyoto strategy will be based on regulatory measures mandating or encouraging reductions in emissions of CO2 that can be imposed under existing environmental authorities, plus renewed legislative initiatives and perhaps a start on drafting a new treaty.

A key element of either strategy is to develop political support from business for a program of immediate reductions. Efforts to develop such support center on proposals to give companies financial credits for taking early action–companies that reduce CO2 emissions in the near future would get credit after 2008, when Kyoto restrictions would come into effect, or under any other system that restricts emissions at some future date if Kyoto goes down.

The major proposal is the Credit for Voluntary Reductions Act (S. 547 & H.R. 2520), which would allow the President to enter into binding obligations to allow emissions at a later date in exchange for reductions made in the near future, thus creating support from businesses that would then possess emissions credits having value only when and if restrictions were imposed.

Opponents of the Protocol grow apoplectic about this strategy, mostly because it might well work. Business hates the public relations dimension of seeming “anti-environment,” so the idea of taking an environmentalist position and making money to boot has powerful appeal. The Pew Center on Climate Change, which was created by the Pew Charitable Trusts, has put together a prestigious Business Environmental Leadership Council that has signed off on a statement about the need for early action. Last fall, Pew held a sold-out corporate conference on the topic.

Opponents also have serious substantive objections to early action proposals, based on their fears about the impact on small businesses, misallocation of resources and skewed incentives for large ones, and hideous practical problems of definitions, baselines, measurement, and accounting. This opposition is coalescing around H.R. 2221, introduced by Rep. David McIntosh, which would bar “implementation without ratification.” McIntosh has picked up 29 co-sponsors, 15 more than the number behind the House version of the early-credit bill.

From the standpoint of practical business people willing to teach it either round or flat, the early action proposals present a problem deeper than assessing who is ahead in the congressional battles. The proposals fit poorly with the realities of the global warming issue:

Even if one is convinced that the scare is real, cutting emissions in the next 10 years in exchange for allowing more of them thereafter is perverse. The period of concern is the years 2050 on, and in that time scale the next decade counts little. From a purely public policy point of view, the optimum strategy is to use the next few years for R&D that will improve energy technologies and climate models, extract as much as possible out of existing capital stock, increase the wealth of the society so as to better afford future investments, and start cutting emissions sometime after 2020.

Science is not cooperating with the alarmists. Concern has never been based on actual data; it has always rested on climate models that predict a rise in temperature as CO2 increases. As more data come in, the models keep springing leaks. Major variables are continually fudged, and feeding in past data does not produce accurate predictions of current climate conditions. For the first time in history, we now have good temperature data, measured by satellites since 1979, and they show no rise. (Alarmists reject this data as irrelevant, saying that the satellites are in the upper atmosphere while we live on earth. This is true, but every model has predicted a rise in upper atmosphere temperatures, so the new data contradict them all.)

Other incoming data–on solar cycles, past temperatures, carbon sinks, past CO2 levels, regional temperature variations, and other topics–are also undermining the alarmist predictions. The matter is far from settled, but the best current estimate is that human-induced warming, if it occurs at all, will be small, well within our adaptive capacity, and even benign. In any event, given the time scale of the problem, we have time in hand to keep working on the science and the models without taking precipitous action.

These realities put business executives in a dilemma. They may be willing to teach that the world is flat if it makes the school board, or the administration, happy, but they do not really want to bet heavily on that proposition when Columbus is about to set sail, and when under any set of plausible assumptions the policy of early action will look rather silly 10 years down the road. As companies focus on these realities, they are demanding more certainty that credits will in fact be worth something. They want tax credits now–one hundred companies petitioned the administration to include credits for energy efficiency and renewable technologies in any 1999-tax bill–or they want a guaranteed future price for emissions credits.

The administration is loath to grant either, because giving real immediate value to early action credits would defeat the political need to give business an incentive to join the drive for mandatory reductions. An additional complication making it difficult to provide immediate value is that, given all the technical problems in defining and measuring emissions, it would be hard for businesses to craft contracts so foolproof that they could survive determined efforts at repudiation by a future administration. And a future administration would have every reason to try this, especially if it concluded that the claimants had joined with the current administration to scam the public.

On the other hand, if the drive to mandate future reductions succeeds, then businesses that stockpiled credits now will indeed batten at the expense of those who did not. It also is certain that political pressure for reductions will continue without regard to either the economics or the science of the issue because the stakes for the environmentalist/administration team are immense. The environmental movement often predicts disaster of some sort, but forecasts are usually of disaster in the far future or at such a low level of risk that they cannot be disproved. It rarely gets itself into a position where its alarms can be falsified in terms that will be obvious to the public.

On the climate change issue, predictions have been made that are capable of falsification– because they are so totally based on the climate models. If the models do not work, then the predictions are wrong. This fact could cast serious doubt on the movement as a whole, and fear of this creates fierce resistance to confessing error.

That a policy is irrational under any set of plausible assumptions is no guarantee that it will not prevail, if the political pressures are strong enough. So corporate America has an interesting problem: Given all these forces, do you teach it round or do you teach it flat?