Tide of economic woes could erode support for new Kyoto pact
Posted on October 10th, 2008By Nathanial Gronewold
Climatewire: UNITED NATIONS — The global financial crisis will have profound implications for next year’s negotiations toward a replacement to the Kyoto protocol that experts are only beginning to appreciate.
Rising fossil fuel prices, energy security concerns and the coming change to a new presidential administration in the United States had boosted the sense of optimism among activists. Despite the slow progress in international talks so far, negotiation leaders were especially hopeful that a changed atmosphere in Washington could help bridge the troublesome divide between developed and developing countries.
But many are now worried that the massive fiscal deficits rich nation governments are incurring in a desperate attempt to shore up international credit and banking systems will leave their constituencies with little appetite for a climate change treaty that calls for an additional reallocation of wealth to poor countries to help them control their carbon dioxide emissions and adapt to the expected ravages of global warming.
That could jeopardize the whole process, since funding for adaptation and technology transfers has been laid out as a key condition to win the participation of massive developing countries like India, China and Brazil in a new agreement.
Already, U.N. officials are concerned that the financial crisis will upset poverty alleviation efforts abroad. At a press conference earlier this week, Secretary-General Ban Ki-moon took pains to praise governments for their commitments of new foreign aid despite the shaky financial system. But he also expressed worries that the deepening crisis was spoiling nations’ appetites for action on climate change.
“The danger is that … the magnitude of the [climate change] threat will be obscured by shorter-term problems, and in particular the deepening financial crisis,” Ban said.
Concern that massive public spending now may harm negotiations later
At a discussion held yesterday at Columbia University in New York on the benefits of raising revenues through carbon taxes versus auctions for pollution permits, Yvo de Boer, executive director of the U.N. Framework Convention on Climate Change, warned that the massive public spending to resolve the credit crisis presents arguably the most serious obstacle to the success of the talks yet.
“I think the financial crisis is going to have a huge impact on negotiations going forward,” said de Boer. “Money is an essential part of the solution.”
Delegates will next meet in Poznan, Poland, in early December to try to hammer out a work plan for next year’s negotiating sessions. Nations are scheduled to complete their work in Copenhagen, Denmark, in December 2009, hopefully drafting an agreement to replace the Kyoto Protocol when it expires at the end of 2012.
The biggest challenge remains bridging the divide between the developed world and major up-and-coming economies. Many rich nation governments insist that big polluters like China and India must adopt binding commitments to control their output of greenhouse gasses, while those countries steadfastly refuse, pointing to the responsibility of developed nations to lead on the issue instead.
Gaining concessions from Brazil, South Africa, India, China and others requires getting wealthier nations to agree to a system of favorable technology transfers and financing for emissions controls in the developing world. But de Boer and others worry that skyrocketing public debt to shore up capital markets makes it much more difficult for national legislators to accept allocating funds for adaptation.
Huge public debts could slow technology transfers
Substantial amounts of debt spending have already been promised for fiscal bailout packages, and the sums only seem to grow by the day. Experts have already said that the United States faces a federal budget deficit next year of over $500 billion, a new record, and that was before the latest crisis hit Wall Street. Last week, Congress approved about $800 billion in additional spending for the U.S. Treasury to buy up non-performing financial instruments, mostly mortgage-backed securities, from the major banks. The government is also considering extending additional credit to businesses in the form of short-term loans, to compensate for the frozen commercial paper market.
European and Asian governments are following suit. The United Kingdom recently announced a $90 billion bailout package for weak financial institutions. The European Union has pumped hundreds of billions of euros into the markets in an attempt to shore up confidence and prevent a virtual run on banks.
Even with these emergency ad hoc measures, most economists are predicting a severe downturn in the global economy in 2009, with many wealthy nations possibly slipping into recession. Weakening economic conditions are expected to direct national priorities away from tackling climate change.
The crisis also further upsets the dynamic of the international talks. Chinese negotiators have repeatedly stated that a favorable system of technology transfer is a condition of their country’s participation in a new agreement. They also said China will not accept binding limitations on its emissions levels.
Despite such pronouncements, Henry Derwent, president of the International Emissions Trading Association, said it will still be possible to get the large developing states on board, provided the right incentives are dangled before them.
‘We’re not going to be financing China’
“I’m sure that the major developing countries will have to take some target” in next year’s negotiating rounds, Derwent said.
Negotiators are exploring various ways to generate revenue for technology and adaptation. One popular idea is auctioning polluting permits across borders, with the money generated from the auction funding various adaptation and mitigation schemes.
But with America’s national debt — much of it held by Chinese central banks — rising to record highs, and with voters already upset over job losses from international trade, it’s becoming increasingly unlikely that the U.S. Congress will agree to join an international credit trading system that mandates a further transfer of wealth to Beijing.
“We’re not going to be financing China,” Jeffrey Sachs, head of Columbia University’s Earth Institute, said bluntly. “We’re not going to buy Chinese permits.”
Businesses are also expected to grow resistant to controls on their activities. Many of the most CO2-heavy industries, especially the automotive sector, are already facing serious challenges of their own. Declining corporate profits could see companies ramping up lobbying efforts to prevent painful mandates from entering climate change legislation.
Corporate resistance to favorable technology transfers could also stiffen. There are major intellectual property rights concerns to address, especially in the case of China, where technology theft and counterfeiting are widespread. Developed-world companies could insist on high royalty payments to mitigate the risk, but Beijing and others would likely strongly object to doling out funds for technologies to help Western countries control atmospheric concentrations of greenhouse gases.
An international carbon tax to generate funds?
Even given the serious challenges for the near future, Sachs argues that the financial crisis could have the unexpected effect of increasing the appeal of direct carbon taxes on upstream polluters.
Switzerland recently proposed an international carbon tax of $2 per ton to help finance adaptation and technology transfers. But many officials, including de Boer, say the idea of new taxes will face serious opposition by business and the public, which is why national systems have tended toward more indirect permit cap-and-trade systems. Auctions of such credits also generate revenue for governments to pour into research and development of new, low-carbon technologies.
But a direct tax on carbon offers a much simpler, more straightforward way to generate the funds. And it also allows governments a more predictable stream of financing that is easier to control. An international regime, with credit auctions and trades crossing borders, makes it more difficult to prevent massive capital outflows from wealthy nations, further putting a crimp on public finances.
And despite the United States’ famed hostility toward taxation, rising deficits could help shift public opinion in that country, Sachs suggested.
“We’re actually going to grow up a little and start talking about taxes,” he said. “We tried to run a country with inadequate taxation, and now we’re broke.”