A paper delivered to the Lavoisier Group Conference, Melbourne, 11 September 2001

Political and Economic Consequences of the Kyoto Protocol:
Post-Bonn Observations

Michael Hitchens

In the city of Bonn at approximately 11.30 am on 23 July 2001, the Chairman of the Sixth Conference of the Parties of the UNFCCC, Jan Pronk, declared an agreement had been reached which would pave the way for countries to ratify the Kyoto Protocol in 2002.

In the time I have today, I would like to give you my interpretation of the politics and economics of the Bonn Agreement.

How is it possible that agreement was reached in Bonn?

My thesis is that there were three key players who might be nominated to share most of the accolades:

• President George W. Bush (with an 'assist' from the former French environment minister)
• Chairman Jan Pronk; and
• Inadvertently, the Australian delegation.

A little background first, before I elaborate on the thesis.

In the time between the negotiation of the Kyoto Protocol in November 1997 and the first half of COP VI in The Hague in November last year, most OECD countries had realized that the economic cost of Kyoto was too high. Certainly President Clinton's Administration had come to this conclusion, and so had Australia, Japan, Canada and some European governments---the latter notwithstanding the EU's strategy of unravelling many of the features of the Protocol designed to minimise cost.

The problem for the United States and the enlightened European governments was how to reduce the cost of the Protocol to acceptable levels while retaining the support of the Green votes crucial to their domestic political fortunes---in the case of the United States, this was the election of Al Gore.

The answer was to indirectly renegotiate the 'assigned amounts' agreed in the Protocol. The tool for this renegotiation was the obscure Article 3.4 of the Protocol, which relates to claiming sinks from forest and land management.

But for the 'assistance' from the former French Environment Minister, a deal would have been made in The Hague.

The deal wasn't made, the French Minister was replaced, and President Bush declared the Kyoto Protocol 'fatally and fundamentally flawed'. However, in so doing, President Bush helped pave the way for agreement at Bonn in two significant ways:

• The main foil to the EU, the Umbrella Group, was now leaderless; and
• Chairman Pronk had a formidable diplomatic 'shaming' weapon---any country or group that frustrated an agreement in Bonn would stand alongside the United States as the wreckers of the Protocol.

Let's return to Bonn in July this year.

It is approximately 10 pm on Saturday, 21 July. Delegations have been talking for a week and most ministers are expected to leave within 24 hours.

Despite what you might have been reading in the press, the EU had made no concessions and the Australian delegation had been most constructive. Indeed, the Australian delegation had been responsible for removing one of two key stumbling blocks for Japan.

As I mentioned earlier, prior to The Hague it had become apparent to Japan that the cost of the Protocol could be crippling. Japan needed to indirectly renegotiate their assigned amount. Article 3.4 was the lever, but how to do it so that Japan was not embarrassed by a special deal?

It seems the Europeans didn't have the wit to figure it out. Ironically, it was Australia that had the answer in the form of a formula that produced Appendix Z of the Bonn Agreement.

In effect, Appendix Z adds about 200MtCO2 per annum to Annex B countries' emissions (excluding the USA)---most significantly to Japan (48Mt/yr), Canada (44Mt/yr) and Russia (65Mt/yr), and also to many EU countries. But not one single tonne to Australia!

Back to Bonn.

Remember its 10 pm Saturday night. Chairman Pronk tables his 'political' text and delivers an ultimatum to the countries of the world---agree or leave Bonn in failure.

Now starts a non-stop, 36-hour, crash-or-crash-through negotiating process during which Chairman Pronk would accept no amendments to his political text.

I'll spare you an hour-by-hour commentary.

Suffice to say that at 1 am on the morning of Monday the 23rd, Chairman Pronk confidently announced that he could get agreement on his text from enough countries representing 55 per cent of Annex I CO2 emissions---that is, enough for the Protocol to enter into force.

Over the previous 27 hours, it seems Chairman Pronk had successfully used the shaming weapon against the developing countries. Incredibly, the Pronk text gave no guarantee of funds to developing countries, yet they agreed. It seems the news headline 'Developing countries side with USA to wreck Kyoto' was to be avoided at all costs by the G77 and China.

But Chairman Pronk also had to announce at 1 am that he had one small problem in the text on compliance.

The compliance text, and specifically the notion of a 'legally binding' Protocol, was Japan's second key stumbling block. But its retention was fundamental to the EU. It seems it was time to threaten the EU with the shaming weapon---and, as they say, the rest is history.

Agreement was reached at Bonn, but as yet the COP decisions necessary to give it effect are not yet complete. We await COP VII with interest.

What, then, might be the economic cost to Australia of the Bonn Agreement?

In a first consideration of this question, a few key points are worth registering:

• First, Australia already imposes costs on itself via a plethora of greenhouse policies and programs:
  • Based on Econtech modelling commissioned by the government to justify the policy, ACIL estimates that the 2 per cent renewables law will cost $800 million in GDP per annum by 2010;
  • There is almost $1 billion in GGAP, renewables and energy efficiency subsidies on offer;
  • And there is a huge hidden cost to the economy as executive and other company resources are wasted on the scramble to capture taxpayer dollars and on regulatory schemes like the electricity generator efficiency standards.
• Second, at least as important as the economic damage Australia may do to itself, is the cost Australia will bear should the rest of Annex-B countries attempt to meet their Protocol commitments:
  • Anything that worsens Japan's already worrying economic health must be a major concern to the rest of Asia and Australia;
  • Coal, LNG, aluminium and tourism export incomes and investment will all suffer;
  • ABARE modelling has suggested that 40 per cent of the costs to Australia of the Protocol are in the form of terms-of-trade losses feeding back to us from our trading partners and competitors.
• Finally---and this is the good news for the world economy---in case there was any doubt, the Bonn Agreement makes it impossible for the USA to ratify the Protocol:
  • Based on ABARE modelling, ACIL estimates that the international price of emission permits would be an unsustainable US$122/tCO2 in the first commitment period.

These initial considerations do not, however, fully answer the question of how much the Protocol will cost. Indeed, with the special first commitment period deals agreed at Bonn, I would suggest that the task is impossible until the rules for second and subsequent periods are negotiated.

The next Government must include transparency of these rules as a pre-requisite for Australian consideration of ratification of the Protocol. Without these rules, any national interest assessment of ratification of the Kyoto Protocol by the Parliament will be deficient.