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EMISSIONS TRADE *

Now that the Fifth Conference of the Parties (COP5) has ended, the existence of a system for trade in greenhouse effect gases has been accepted, even though it may not yet be possible to divulge the categories for participants therein: some with fixed emissions limits, and others without. The feeling of the majority is that the Parties to the Convention are trying to build a system based on the provisions of the Kyoto Protocol and defining ways to reduce the cost of compliance with commitments for the Annex B group, while providing a substantial flow of capital through projects for countries not included in the annex, thus encouraging economic growth. In summary, we can now think of a game, but we cannot start playing it.

This same tone on climate continues with respect to Latin America itself, which is encouraging countries to make further reductions in emissions through mutually beneficial trade. Given their need for sustainable development, in one way or another the region must consider trade in emissions as a non-exclusive instrument. Other policies and measures (command and control, patterns, etc.) and other economic instruments (taxes, fines, etc.) are also necessary for environmental protection. For some, trade in emissions means that “markets would solve everything if no governmental action existed”.

To the contrary, emissions markets mix governmental or inter-governmental decisions encouraging environmental objectives with market forces creating conditions so that societies may have access to them at the lowest possible cost. Though in many ways different, taxes on carbon emissions, another kind of economic instrument, would use more or less the same mix.

These economic instruments enable us to reach a certain environmental objective at least cost, or to achieve improved environmental performance at a set cost. For this reason, there is a moral obligation to broaden the use of economic instruments. A decrease in the cost of reaching a specific environmental objective will absorb [T.N. - free up?] scarce resources that should be used for taking care of other urgent needs, especially in Latin American countries. Encouraging environmental performance at a given cost is our responsibility toward those who are gradually suffering the effects of a degraded environment: the poor and future generations. Development and implementation of proper economic instruments for environmental protection is the cornerstone of sustainable development.

Climate change is one of the significant environmental threats of our time. All our efforts should be focused on building an efficient international system operating at favorable costs to confront this threat by mitigating and controlling it based on the provisions of the Kyoto Protocol approved by all the parties.

The preamble to the United Nations Framework Convention for Climate Change (UNFCCC) provides that the Parties shall accept the Convention because they recognize that “the worldwide nature of climate change requires the broadest possible cooperation by all the countries and their involvement in an effective, appropriate international response in accordance with their common but differentiated responsibilities, their own respective capabilities and social and economic conditions”.

Article 3 (Principles) of the UNFCCC also provide that “The Parties have a right to sustainable development and should encourage it. The policies and measures for protecting the climate system against change caused by mankind should be appropriate to the specific conditions of each of the Parties and should be incorporated into national development programs, realizing that economic growth is essential for the adoption of measures for confronting climate change.”

The definition of the Clean Development Mechanism (CDM) is already encouraging measures, though limited, for the “broadest possible cooperation by all countries”, without “introducing any new commitment” for developing countries. This, then, is the question that arises: is it possible for developing countries to participate in trade for emissions without having to adopt new commitments?

First off this seems difficult. Under existing systems for transactions in certified emissions reduction units (CERs), all entities involved assume a commitment. They have a limit for their emissions so they can market their CERs, buy CERs if their actual emissions are higher than the level they were assigned, and sell them in the opposite case. This is the reason why such systems are often called “ceiling and trade” systems. It is obvious that an entity could not put together a CER trade system with an unlimited amount of these units for marketing without destroying the system itself.

However, assignment of marketable CERs may be distinguished from the imposition of an actual emissions limit. A finite number of marketable certificates may be granted to some entities instead of a true emissions limit. A CER market could work if other entities, or at least one, are given or accept limits, thus making them into potential buyers and sellers. No entity without a “ceiling” for its emissions would be a potential buyer, but only a potential seller, provided its actual emissions were at a level higher than the assigned level. Also, if its emissions go above this limit, the entity could not participate in the certificates market because it would not be in a position to sell nor to seek certifications for its emissions. [T.N. - esto me deja confuso]

Establishment of the CDM (Article 12 of the Kyoto Protocol) can be seen as an attempt to give substance to the agreement mentioned in the preamble to the Convention, taking into account the principle of common but differentiated responsibilities.

The scope of the CDM resides in the fact that it is limited to “project activities”. However, there is a need to determine a point of reference for these activities, to insure that any emissions decreases resulting from them are “in addition to decreases that would be produced in the absence of the certified project activity.” This proposal has the fairness needed for simplifying the matter.

Therefore, although the CDM may turn into a business, total participation by developing countries in emissions trade will remain as a very important option.

On the other hand, lack of financial resources may make the CDM an attractive option for at least some big projects. This would be particularly true if it were stipulated that trade would only be permitted after the decreases had been monitored “according to a set of standards”.

The proposal would eventually encourage non-Annex B countries to buy decreases from developing countries. These decreases, at times called “win-win”, would then become “win-win-win”. This goes past requirements and even the principles established by the Convention or Protocol. It is also possible to assert from the economic point of view, that investments or profit-making actions, once they are identified with some precision, would be viable on their own merits.

The Conference of the Parties is the supreme Body of the Convention and as such it has the power to make decisions encouraging effective implementation of the Convention within its area of expertise. Many criteria and formulas can be developed and proposed to help negotiators define ceiling assignments and solutions for different countries; all these efforts are valid and can help. However, in the final analysis, decisions will be made in a process of negotiation, and the important thing will be to prepare Latin America to participate in it as a region that seeks sustainable development for itself.

* Article first published in Calidad Ambiental, Vol. IV, N. 6, Nov-Dec. 1999, p. 16.

** Paulo Manoel Protasio is a businessman with a background on Law and Business Administration. As a businessman leader, he has promoted the creation of the Commercial Development Council of the Industry and Trade Department of Brazil, of which he was the first General Secretary. Mr. Protasio was chairman of several organizations, such as EMBRATUR (Brazilian Tourism Institute), ABM (Brazilian Marketing Association), ABECE (Brazilian Association of Commercial Export Companies), and WTCA (World Trade Center Association). In addition, he has been the founder of organizations such as WTA (World Teleport Association), ALAT (Latin America Association of Trading), and the CAP (Port Authorities Council). Nowadays he is the President of the International Emissions Trading Association – IETA, the Director of the Brazilian Business Council for Sustainable Development and Vice-President of the Brazilian Foreign Trade Association. During four years he exercised the presidency of the Rio de Janeiro Trade Association, and in 1991 he was appointed by the Brazilian President Fernando Collor as Coordinator of the UNCED Meeting, known as Rio 92 or Earth Summit.