Kyoto and Beyond

Understanding the legal framework for reducing greenhouse gas emissions

All roads leading to the control of greenhouse gas emissions pass through Kyoto, right? Wrong! The Kyoto Protocol is just one part of the burgeoning web of mandatory, voluntary, and market-based programs for addressing global climate change. This article outlines the basic legal mechanisms of the Kyoto Protocol and a few of the alternative and emerging strategies for achieving, getting credit for, and profiting from corporate greenhouse gas (GHG) emissions reductions. Virtually each approach starts with a reliable GHG emissions inventory.

The Kyoto Protocol regulates six GHGs, the three most prevalent of which are being emitted from both natural and anthropogenic sources. The leading GHG is carbon dioxide (CO2), emitted by humans primarily through fossil fuel combustion and deforestation. The runner-up is methane (CH4), emitted from fossil fuel production, landfills, agriculture, and livestock. Nitrous oxide (N2O) results from combustion, fertilizers, and industrial processes. Hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) are synthetic industrial gases. HFCs and PFCs are used in the semiconductor industry and for refrigeration. PFCs are also generated through aluminum smelting and uranium enrichment. SF6 is used to insulate high-voltage equipment. Another set of GHGs, chlorofluorocarbons, is regulated under the Montreal Protocol.

Each GHG has been assigned a global warming potential, standardized to the warming potential of CO2, so that the relative warming effect of each GHG can be compared. The cumulative warming effect of a mass unit of CO2 over 100 years is assigned the value of "1." One gram of CH4 was estimated to have 21 times the warming effect as a gram of CO2 over 100 years, and therefore has a global warming potential of 21. The highly potent SF6 has a warming potential of 23,900. These multiples may be amended as the science advances.

Kyoto Protocol
Developed pursuant to the 1992 United Nations Framework Convention on Climate Change (Convention) during the 1990s, the Kyoto Protocol became legally binding on February 16, 2005. Participating industrialized nations and countries transitioning to a market economy (known as Annex I Parties) agreed to cut collective GHG emissions to 5.2 percent below 1990 levels during the 2008 -- 2012 time period. Each Annex I Party is assigned a quantified emission limitation and reduction commitment, ranging from an 8 percent reduction in GHG emissions (European Union countries) to a 10 percent increase (Iceland) from 1990 levels. The United States, which did not ratify the Kyoto Protocol, was assigned a 7 percent reduction. Developing nations, including Brazil, China, and India, have no emissions targets. As required under the Protocol, the Parties must begin negotiating in 2005 for a second set of reductions for the post-2012 era.

Annex I Parties may achieve their commitments by reducing GHG emissions and, to a limited extent, by increasing the removal of GHGs from the atmosphere with carbon sequestration. Actual GHG reductions are derived from fuel switching (coal to natural gas; fossil fuels to renewable energy), increased energy efficiency, industrial process improvements, and product substitutions. GHGs removed from the atmosphere through eligible carbon sequestration activities, such as afforestation, reforestation, revegetation, cropland management, and grazing management, generate emissions credits called removal units (RMUs).

The Protocol establishes three flexible mechanisms to help reduce the cost of emissions reductions and sequestration.

  • Under Joint Implementation, a participating Annex I Party may implement a reduction or removal project in the territory of another Annex I Party and count the emissions reduction units (ERUs) against its own target.
  • With the clean development mechanism (CDM), an Annex I Party may implement a project in a developing country without an emissions target and use the resulting certified emissions reductions (CERs) to meet its own target.
  • For international emissions trading, a country with excess GHG emissions capacity may transfer some of its authorized emissions, known as assigned amount units (AAUs), to another country that would otherwise exceed its emissions commitment. RMUs, ERUs, and CERs may also be traded. Businesses, environmental NGOs and other entities may participate in the mechanisms under the auspices of their local government.

The Annex I Parties have submitted emissions data necessary to establish their GHG baseline emissions inventory. They must also provide annual emissions inventories and maintain a national registry to track projects and trades. If a country fails to meet its emissions target, it must make up the difference in the second commitment period, plus a 30 percent penalty, develop a compliance action plan, and refrain from emissions trading.

The most developed Annex I Parties (known as Annex II Parties) must provide funding and technology, generally through the Convention's financial mechanism, to enable developing countries to undertake emissions reduction activities under the Convention and to help them adapt to the adverse effects of climate change.

All countries that ratified the Convention, including the United States, have common obligations under Article 4.1 of the Convention. Each country must periodically publish national GHG emissions inventories, implement national programs for reducing emissions and adapting to climate change, and promote technology transfers and sustainable management practices. Countries must also submit national communications to the Conference of Parties describing their national mitigation programs. The parties must also establish a designated national authority to review and approve CDM projects.

European Union
The European Union's (EU) 8 percent reduction commitment under the Kyoto Protocol has been redistributed in differing amounts among the EU member states. Reductions will be implemented through EU directives on a variety of measures, including energy efficiency, demand management, investment in technology, public awareness, transportation policy, and emissions permits. Each country must develop a national allocation plan (NAP), capping GHG emissions from industrial sectors and assigning emissions allowances to individual facilities. One allowance equals one ton of CO2 or the carbon dioxide equivalent (CO2e) based on global warming potential. Subject facilities must have a GHG emissions permit, issued by the country or EU authority. The permit specifies the required monitoring and reporting methodology and includes an obligation to surrender, by April 30 of each year, a quantity of allowances equal to the total GHG emissions from the facility for the previous year.

Under the EU Trading Scheme, allowances may be traded between facilities and EU member states and may be sold to non-Kyoto countries and facilities (e.g., to U.S. companies). The Scheme also recognizes the Kyoto Protocol's Joint Implementation and CDM programs, whereby EU operators may use ERUs and CERs, other than those derived from land use measures, as EU allowances to meet their emissions limitations under the NAPs. The scheme provides for excess emissions penalties, member state sanctions, and an electronic database for registering and tracking allowances and compliance.

Regional Greenhouse Gas Initiative
The U.S. Circuit Court of Appeals is currently considering whether the federal Clean Air Act authorizes the U.S. Environmental Protection Agency (EPA) to regulate CO2 emissions. Absent regulatory leadership from EPA, several states have taken the initiative to impose mandatory controls on GHG emissions. Nine Northeastern states formed the Regional Greenhouse Gas Initiative (RGGI) in 2003 to develop a regional cap-and-trade program for CO2 from power plants.

After extensive data collection and economic modeling, RGGI is poised to determine the size of the regional emissions cap, set state emissions budgets and allocation rules, and issue model rules for states to use for implementing the program. Critical decisions involve whether to charge a fee for the allowances, whether to impose a hard cap or an emissions limit as a ratio to electric output, and deciding how to account for the import of cheaper power from outside the RGGI carbon-constrained states. Phase II of the initiative will involve the development of offset mechanisms for crediting surplus verifiable reductions from outside the electric power sector.

West Coast Governors' Global Warming Initiative
In November 2004, the governors of Washington, Oregon, and California adopted recommendations designed to cut GHG emissions on the state and regional levels. Key strategies included the development of state and regional GHG emission reduction goals and a regional market-based carbon allowance system, the adoption of GHG vehicle emissions standards and energy efficiency standards for products not regulated by the federal government, and the expansion of markets for renewable energy and alternative fuels.

The California Air Resources Board adopted the first GHG vehicle emissions standards (based on fleet averages) and is defending the standards in a federal lawsuit brought by the major automobile manufacturers, claiming that the rule is a fuel economy standard subject to the sole authority of the National Highway Traffic Safety Administration. The other West Coast and Northeastern states plan to adopt the California vehicle standard.

Department of Energy's Climate Registry
Established under Section 1605(b) of the Energy Policy Act of 1992, the Climate Change Registry allows facilities to voluntarily report to the U.S. Department of Energy (DOE) their GHG emissions inventories and emissions reductions or offsets. Over 200 companies in various industries currently report to the registry as a means to communicate their commitment to GHG reductions to their customers and shareholders. The companies had also anticipated that reported reductions and offsets could be used in the future if GHG reductions ever become mandatory in the U.S.

Responding to a Bush Administrative directive and criticism over the flexible standards for reporting, verification and monitoring, DOE has recently issued revised interim final general guidelines and draft technical guidelines for public review and comment. In order to register reductions under the new guidelines, entities with average annual emissions exceeding 10,000 tons of CO2 equivalent must provide an inventory of their total emissions and calculate the net reductions associated with entity-wide efforts to reduce emissions or sequester carbon. Significantly, the revised guidelines allow entities to report, but not register, emission reductions achieved prior to 2003, thus rejecting early participants' expectations that prior reductions would receive future credit. The guidelines also allow participants to report and register reductions achieved internationally. Once finalized, the guidelines will serve as the primary GHG emissions reduction reporting protocol and mechanism for participants in EPA's Climate Leaders program and in DOE's Climate VISION program.

Conclusion: Variations on a Theme
The Bush Administration is supporting research efforts to develop carbon emission reduction and sequestration technologies and voluntary measures to reduce companies' greenhouse gas intensity, the ratio of GHG emissions to a unit of economic output. Ironically, the international framework for reducing GHGs is based to a significant degree on the U.S. Acid Rain Program for controlling sulfur dioxide emissions, relying on emissions baselines, inventories, caps, allowance trading, and sophisticated financial markets. Regional and state programs are building on this framework with an innovative mix of regulatory controls, incentives, and market-based strategies designed to change the way the world does business.

This article originally appeared in the 06/01/2005 issue of Environmental Protection.

About the Author

Laura L. Whiting, JD, is senior counsel with Occidental Chemical Corporation in Dallas and formerly a partner in the resources, regulatory, and environmental law practice of Hunton & Williams LLP. She is a 1988 graduate of the University of Texas School of Law and obtained her undergraduate degree in international business from the University of Texas at Austin. She can be reached at 972-404-3300. The views expressed herein are those of the author and do not reflect the opinions of any organization with which the author is affiliated.

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