Kyoto's Impact on the U.S. Business Climate: Hot or Cold?

Things are starting to heat up and we're not just talking about the Earth's atmosphere. In the wake of the Kyoto Protocol going into effect on February 16 after Russia's ratification of the agreement in the fall of 2004, many domestic and foreign companies are beginning to change the way they conduct business in order to take advantage of the new opportunities created by the treaty.

In 2001, President Bush withdrew from the 128-nation Kyoto agreement, which seeks to cut carbon dioxide emissions from 1990 levels by five percent by 2012. According to the treaty's proponents, the rationale behind this reduction is to reverse what they view as the dangerous trend of global warming. The president argued that the treaty was too expensive and wrongly excluded developing nations. Of the large industrialized countries, only the United States and Australia refused to join the United Nations' effort. But these two nations account for around one third of global green house gas (GHG) emissions.

The United States' refusal to ratify Kyoto has not ended the country's efforts to address climate change. Instead, these efforts have intensified, but they have moved beyond the federal government to encompass the state governments and the courts. For example, on November 18, 2004, the governors of California, Oregon, and Washington state approved new actions to cut greenhouse gas emissions on both the state and regional levels. California Gov. Arnold Schwarzenegger (R), Oregon Gov. Ted Kulongoski (D), and Washington Gov. Gary Locke (D) adopted 36 new recommendations, which include provisions for reducing average annual greenhouse gas emissions from state fleet vehicles, coordinating purchases of hybrid vehicles, and increasing energy sales from renewable resources. The governors also agreed to consider regional approaches to address global warming, such as developing a market-based carbon allowance program. Such measures are placing increasing pressure on U.S. companies to make targeted shifts in their environmental management practices.

According to Edward Hoyt, vice president of Econergy International Corporation (www.econergy.net), executives of U.S. companies now ignore the Kyoto Protocol at their peril, not only because participating countries -- including the European Union, Canada, and Japan -- are implementing regulations that will affect U.S. subsidiaries in those countries, but also because the Kyoto Protocol creates significant business opportunities for U.S. companies.

Hoyt points out one example is the Kyoto's Clean Development Mechanism, which allows companies within the regulated economies (called Annex I countries), such as Japan, Canada, or the members of the European Union, to purchase emissions reductions from projects in emerging economies, where the cost of curbing emissions is cheaper. Thus, a U.S. company with operations in Mexico, for instance, could elect to undertake investments that would reduce emissions there and sell them -- at prices now in the range of $4.00 to $6.00 per ton of carbon dioxide equivalent reduced -- to buyers in Canada, Japan, or Europe. Hoyt notes that the international market for carbon created by Kyoto -- which was projected to hit $500 million in 2004 and will be perhaps two times that in 2005 -- offers dramatic opportunities for U.S. companies. He points out that if they don't

Along the same lines, several industry experts from ICF Consulting (www.icfconsulting.com) recently pointed out that U.S. companies are at a competitive disadvantage as companies in the rest of the world take action to become Kyoto compliant.

"International competitors are already moving aggressively to compete in a world that will see increasingly stringent carbon constraints. These companies realize that climate change will offer both risks and opportunities to their businesses. They are proactively working to reduce their own carbon exposure and to develop and aggressively market climate-friendly products to give them a competitive advantage in the global marketplace," said Craig Ebert, an ICF consulting managing director who leads the firm's climate strategy work.

Agreeing with Ebert's analysis, Abyd Karmali, director of ICF's London office, said "As many companies are discovering, investments to reduce their GHG emissions can improve their bottom line, as evidenced by British Petroleum (BP), which has saved $650 million annually by aggressively reducing its emissions. GHG constraints are already a reality for business internationally and investments to reduce emissions are valued in the billions of dollars."

So what might be the real effect of the Kyoto treaty on American companies? U.S. businesses could be left out in the cold if they don't turn up the heat on their efforts to go after the revenues to be gained from a new industry created almost completely as a result of Kyoto: carbon trading.

This editorial originally appeared in the March 2005 issue Environmental Protection, Vol. 16, No. 2.

This article originally appeared in the 03/01/2005 issue of Environmental Protection.

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