Almost ten years after meetings of the United Nations Framework Convention on Climate Change began the treaty development process, the Kyoto Protocol will finally enter into force as an international agreement on February 16, 2005. With the Russian Federation’s ratification in November, the necessary requirements for entry-into-force of acceptance by at least 55 countries including industrialized countries representing at least 55% of 1990 carbon dioxide emissions have been met. Though it is not the absolute solution to preventing climate change, the Kyoto Protocol represents the important first step of establishing international cooperation to address the issue of greenhouse gas emissions effects on the environment.

Responding to interest and concern regarding the entry-into-force of the Kyoto Protocol, we have included some of the more frequently asked questions on this topic and hyperlinks to First Environment’s responses below:

Climate Change: FAQ #6:

Why did Russia ratify the Kyoto Protocol?

The decision by Russia to ratify the Kyoto Protocol in November 2004 has economic and political implications for the country.

Though some believe ratification of the Kyoto Protocol will bring very little help to the Russian economy, there are many who argue that through the sale of emission credits Russia’s economy will benefit. The reason that Russia has emission credits to sell is related to the design of Kyoto Protocol targets. National GHG reduction targets for the first commitment period (2008-2012) of the Kyoto Protocol are based on the amount of GHGs the country emitted in 1990. Due to the collapse of the Soviet Union and its industries in the early 1990s, Russia emits less GHGs today than in 1990. This situation produces an opportunity for Russia to sell its excess emission allowances to other countries whose emissions exceed their targets.

Despite these economic issues, it appears that the ratification of the Kyoto Protocol was more the result of political process than scientific analysis or policy debate. In particular, there has been talk of increased European Union support for Russia's bid to join the World Trade Organization (WTO), in response to its ratification of the Protocol. For more than 10 years, Russia has been applying the join the WTO. In order for any new country to join this international body, every one of the current 148 WTO members has to agree. According to some sources, Russian President Vladimir Putin’s support of the Kyoto Protocol, which was the major impetus for its passage through the Russian Parliament, was the result of President Putin's personal commitments to European Union leaders in exchange for the European Union’s green-light on future entry in the WTO.

How can the Kyoto Protocol affect Russia’s economy?

As with most economic predictions, it depends on whom you ask. Optimists maintain that Russia’s economy will boom as a result of its new ability to participate in the “flexible mechanisms” the treaty provides. In the short term, Russia will benefit from a net surplus of emissions allowances, since the 1990 baseline year was a year of high economic output (and also emissions) of the former Soviet Union. Consequently, Russia will be able to trade or sell its surplus credits on the international market to other industrialized countries that have exceeded their limits. Foreign direct investment through Kyoto’s project-based Joint Implementation mechanism could also boost the economy.

With respect to longer term projections, Kyoto’s impact on Russia’s economy becomes less clear. Fundamentally, the effect on Russia’s economy will depend largely on its gross domestic product (GDP) growth and any improvements Russia can make in its “carbon intensity” of GDP. By lowering carbon intensity, an economy is able to produce more value in goods and services for a given amount of carbon released.

Complicating the matter is President Putin’s target of doubling the GDP in ten years. Andrei Illarionov, the chief economic adviser to Putin, has suggested that future growth in the Russian economy will be limited by Kyoto. In contrast, a policy research working paper prepared in November concludes that Russia will not see its growth negatively impacted by Kyoto targets.

Why was Russia’s ratification important to the Kyoto Protocol?

The Kyoto Protocol could only take effect or “enter into force” after ratification by a minimum of 55 countries, which must include developed countries representing 55% of carbon dioxide emissions in 1990. Prior to Russia’s support and signature, developed countries which ratified the Kyoto Protocol only represented 44.2% of 1990 global GHG emissions, and short of the threshold required by the protocol. Without Russia's support, the pact — which had been rejected by the United States and Australia — could not have come into effect.

With Russia accounting for 17.4% of carbon dioxide emissions in 1990, Russia’s participation brought the percentage of developed countries’ carbon dioxide emissions in 1990 to 61.6%, above the needed 55% threshold. After Russia ratified, the threshold was met, and the 90-day countdown to February 16, 2005 (when the international climate treaty will come into force) began.

What is the timeframe for entry-into-force of the Kyoto Protocol?

The Kyoto Protocol will enter into force on February 16, 2005, which is 90 days from Russia’s ratification on November 18, 2004. Entry-into-force means that as of February 16, 2005, participating countries will be legally bound to meet quantities targets for reducing or limiting greenhouse gases. Entry into force also means that the international carbon trading market will become a legal and practical reality. Finally, it means that the Clean Development Mechanism (CDM) will move from an early implementation phase to full operations. The CDM will encourage investments in developing-country projects that limit emissions while promoting sustainable development.

How will the Kyoto Protocol be enforced?

The Kyoto Protocol itself binds governments to meet their respective commitments. Sanctions for failure to meet commitments would apply to governments, rather than companies. Enforcement for businesses will depend on each country’s domestic implementation strategy.

The Kyoto Protocol has a comprehensive and rigorous approach for ensuring compliance. Compliance and enforcement of the Protocol is governed by a Compliance Committee made up of two branches: a Facilitative Branch and an Enforcement Branch. Each branch is comprised of members from official U.N regions. The Enforcement Branch has the power to determine sanctions for countries not meeting their commitments.

Are countries besides the European Union developing programs to meet Kyoto Protocol commitments?

Yes, several other parties to the Kyoto Protocol are working on domestic greenhouse gas programs. Japan has issued a general policy regarding GHG reductions, but it has not yet released a detailed plan, though discussions on such a plan have included mention of a potential carbon tax. Canada’s Greenhouse Gas Division of Environment Canada has been assigned responsibility for developing, monitoring, analyzing and reporting emissions and removals of greenhouse gases.

When will the U.S. have to comply with the Kyoto Protocol?

As a country, the U.S. will not have to comply with the Kyoto Protocol until the U.S. government ratifies the Protocol. However, U.S. multinational companies with subsidiaries operating in Kyoto party countries will have to comply with Kyoto on February 16, 2005 in those participating countries. Therefore, U.S. multinationals could be subject to Kyoto’s emissions reduction targets despite U.S. non-party status.

How does Kyoto Protocol entry-into-force affect the EU Emission Trading Scheme?

Though the EU ETS was implemented independently from the Kyoto Protocol, its intent was to facilitate European countries achievement of their commitments in the Kyoto Protocol. Entry-into-force does not affect the implementation of the EU ETS, but does provide additional certainty. It also potentially expands GHG emission markets beyond the borders of Europe to other countries participating in the Protocol such as Japan and Canada. Entry-into-force also ensures the existence of the Clean Development Mechanism; credits from which can be used to comply with EU ETS requirements.

How will Kyoto Protocol entry-into-force affect the price of GHG credits?

As stated in the previous response, the entry-into-force of the Kyoto Protocol increases the number of countries facing binding commitments regarding GHG reductions. This expansion establishes increased demand in GHG emission markets as entities in these countries compete to acquire allowances and credits to ensure compliance. Kyoto Protocol entry-into-force also brings increased supply as allowances from Russia enter the market. While it is unclear how these factors will exactly influence GHG credit prices, it is likely that GHG credit prices will rise, especially in the short term.

What is the impact of the Kyoto Protocol on non-ratifying countries and their businesses?

Countries that have not ratified the Kyoto Protocol such as the United States and Australia are not subject to its commitments. These countries now exist outside the structure of the international agreement. Perhaps the most significant aspect of non-participation in the Kyoto Protocol is the likely exclusion of these countries and their businesses from the developing international GHG trading markets which will transact emissions allowances and reduction credits.

How will Kyoto entry-into-force affect my business?

The impact of the Kyoto Protocol on businesses depends on whether or not the business is located in a country participating in Kyoto; whether the company is in a developed country with a target; or in a developing country. If the business is located in a non-participating country, the entry-into-force will likely have little effect. If the business is situated in a participating developed country, GHG regulations to allow the country to meet its Kyoto commitment can be expected to be implemented by 2008 if not sooner, such as in the EU. Companies in participating countries may also take part in emission trading schemes and the financial prospects which trading provides. If the business is located in a developing country, the Clean Development Mechanism may provide opportunities for emission reduction projects. Multi-national businesses which own facilities in all of these types of countries will be affected most as they will need to develop systems to maintain balance, ensure compliance and pursue opportunities across these boundaries.

How can I get more information on the Russia’s ratification and Kyoto Protocol entry-into-force?

Further information on Russia’s ratification and the Kyoto Protocol’s entry-into-force can be obtained from the following sources:

Jay Wintergreen

jtw@firstenvironment.com

First Environment Inc.

770 L Street, Suite 950

Sacramento, CA 95814

Tel: 916-492-6080

Fax: 916-492-6089

The United Nations Framework Convention on Climate Change website also addresses these issues at: http://unfccc.int/