Delegates from more than 160 nations met for 12 days at the Third Conference of the Parties to the U.N. Framework Convention on Climate Change.¹⁴ In total, an estimated 10,000 government, nongovernmental, industry, and media representatives attended the December 1997 meeting, the aim of which was to begin reversing the overall upward trend in global greenhouse gas emissions.

The diplomatic deliberations in Kyoto were guided by the work of the Intergovernmental Panel on Climate Change (IPCC), a U.N.-appointed panel of 2,500 of the world's leading scientists. The IPCC concluded in 1995 that "the balance of evidence suggests a discernible human influence on global climate."¹⁵ This landmark finding has shifted the scientific debate beyond discussion of whether the Earth is warming and toward greater understanding of the effects and of actions to slow climate change. Since 1995, global average temperatures have continued to set records -- making the 1990s the hottest decade in 600 years, according to a 1998 study.¹⁶

The IPCC has concluded that a 60-80% cut in greenhouse gas emissions will ultimately be needed to stabilize atmospheric concentrations of the gases and avert serious climate disruptions.¹⁷ This is a long-term goal, made more daunting by the fact that today less than half the world's population enjoys the benefits of a fossil fuel economy. This implies what IPCC Chairman Robert Watson has termed an accelerated "decarbonization" of the world's energy system over the next century -- a dramatic reversal of the nearly fourfold expansion in carbon emissions since 1950.¹⁸ (See Figure 1.)

The purpose of the Kyoto negotiations was to establish a near-term goal for more modest emission cuts in the next decade or so -- going beyond the voluntary target agreed to in Rio in 1992 of holding industrial-country emissions to their 1990 levels in 2000. The European Union (EU) has come close to meeting that goal, while the United States, Japan, Canada, and Australia are on course to miss the Rio target by 10% or more.¹⁹

After much diplomatic maneuvering and compromising, the Kyoto Protocol was agreed to on December 10, 1997. Once ratified and legally in force, it will commit what is known as Annex I industrial countries (which includes former Eastern bloc nations) to cut their collective greenhouse gas emissions to at least 5.2% below 1990 levels during the 2008-12 "budget period."²⁰ This will slow the rate of climate change only slightly, but if implemented and continuously strengthened, it could precipitate important changes in energy policies, accelerate the commercial development of key technologies, and set the stage for more drastic emissions cuts in later decades. Under the Kyoto agreement, developing countries -- whose emissions are typically less than one-fifth the per capita levels of industrial countries -- are not assigned emissions limits, though under the original framework treaty they are required to submit regular reports on trends, and they are expected to be covered by limits established in a later amendment to the protocol.

In the Kyoto Protocol, individual industrial countries were assigned a range of different commitments that were politically negotiated among the parties.²¹ (See Table 2.) The United States agreed to a 7% cutback from 1990 levels. This is a bigger cut than it appears at first glance: by 1997, U.S. carbon emissions were already 10% above that level, and under a business-as-usual scenario they could be more than 25% over that level by 2010. Meeting the Kyoto target would appear to require a sharp shift in direction for the U.S. energy economy.

Other countries successfully lobbied for looser restrictions: Australia, for instance, is permitted to increase its emissions by 8%.²² And Russia, Ukraine, and other former Soviet bloc countries are allowed to return their emissions to 1990 levels -- which actually translates into more than a 30% increase from the depressed levels they had reached in 1997. As a result of recent economic trends in these countries in transition, 1997 emissions from Annex I nations as a whole are already 2.3% below 1990 levels, which means that achieving the Kyoto target would leave industrial-country emissions only 2.9% below 1997 levels.²³

Governments are free to choose how to reduce their emissions, though the protocol provides an optional menu of eight groups of national policies and measures that might be implemented. Of most interest to the renewables industry is Article 2, subparagraph iv: "Promotion, research, development and increased use of new and renewable forms of energy, of carbon dioxide sequestration technologies and of advanced innovative environmentally sound technologies."²⁴ Other listed measures to reduce the greenhouse burden include enhancing energy efficiency, tax and subsidy reform, encouraging reforms in transportation policy, and capturing methane.

The IPCC has pointed to a large role for renewable energy in meeting the eventual goal of virtually replacing fossil fuels, noting that "in the longer term, renewable energy sources could meet a major part of the world's demand for energy."²⁵ This would, in turn, bring about sharp cuts in carbon emissions -- under one of the IPCC scenarios, to below 2 billion tons by 2100. In the short term, however, most analysts agree that renewable energy sources will play a smaller role in reducing emissions compared with such low-cost options as improving automobile efficiency, replacing coal with natural gas, and switching to cogeneration. Still, the European Commission climate plan issued two months before Kyoto suggested that one-quarter of the emissions reductions it plans by 2010 could be achieved by deploying renewables.²⁶

One thing that has become clear in the climate negotiations is that renewable energy has decisively replaced nuclear power as the energy source that governments are most counting on to replace fossil fuels. Although the nuclear lobby has aggressively lobbied for consideration of this energy source as a climate-friendly option, most governments that take the climate issue seriously are not planning on additional nuclear capacity. This reflects a strong shift in public opinion, which has made nuclear power unacceptable among a large majority of Europeans since Chernobyl. In the United States as well, nuclear power has lost ground with the public and the power industry. The exception is Japan, where nuclear power is also unpopular, but where the pro-nuclear Ministry of International Trade and Industry (MITI) included the construction of 20 nuclear plants in its pre-Kyoto climate plan.²⁷ Most Japanese observers believe that this is politically unrealistic due to strong, locally based opposition to additional nuclear plants, and will never be carried out.

The Kyoto Protocol also includes the option of counting carbon absorption from forests, bogs, and other "sinks" as an offset against emissions. Some countries argued that there is not yet enough scientific understanding of natural carbon cycling to establish full accounting and verification procedures for carbon sinks. Under the agreement, carbon flow resulting from both additions to and subtractions from sinks is to be included in national inventories, so long as it reflects "verifiable changes in stocks in each commitment period."²⁸ At present, the activities to be accounted for in calculating sinks are limited to "afforestation, deforestation, and reforestation," and it remains unclear how these terms will be defined and what other activities will also be included in sink calculations.

According to the State Department, which negotiated the protocol, including other greenhouse gases (such as methane) and carbon sinks in the calculation of reductions will allow the United States to avoid cutting its carbon emissions to 7% below their 1990 level (as called for in the protocol). The U.S. government expects its annual absorption from qualifying sinks to equal 2-3% of 1990 carbon emissions, and other gases may add another percentage point or two.²⁹

The Kyoto Protocol also embraces international emissions trading -- a provision that allows individual governments to buy and sell emissions credits or allowances to meet their commitments, which is intended to encourage emissions cuts in countries where the most economical reductions are possible. The emissions trading concept has been promoted most heavily by the U.S. government, which has considerable experience with this strategy from dealing with a range of local and regional air pollutants.

The Clinton administration believes that it will be able to purchase emission allowances from former Soviet bloc countries for far less than emissions can be reduced domestically. In March 1998, Council of Economic Advisers Chair Janet Yellen said that the U.S. administration is relying on such trading to make its Kyoto commitments affordable.³⁰ According to an assessment by Resources For the Future, the administration may be counting on trading to meet as much as 85% of its Kyoto commitment -- which, together with other "flexibility" measures, would allow the United States to increase its carbon emissions to well above not only the 1990 level but current levels as well.³¹ (See Figure 2.)

Considerable debate still revolves around the generous emissions allowances given Russia and Ukraine in the protocol; they are permitted to return to their 1990 emission levels by 2010 even though they are currently 33% and 56% below them. These nations have per capita emissions above the European average, declining populations, and outdated, inefficient equipment likely to be shut down soon. Even a booming economic recovery is unlikely to push their emissions close to 1990 levels in 2010.³² This would leave the Russians and Ukrainians with a windfall of emission allowances that could be sold on the open market -- something that has been labeled "hot air trading" since it would trade past emission reductions rather than reduce future emissions. European governments believe that such trading would weaken the targets agreed to in the protocol, and diminish pressure for domestic policy reforms. For renewable energy, the biggest danger of this approach may be that a glutted market of relatively low-cost emission allowances could reduce the incentive to develop domestic renewables or to engage in project-based emissions trading, which would directly channel funds to renewables.

A closely related "flexibility measure" endorsed in the agreement is joint implementation (JI, also known as activities implemented jointly, or AIJ), which has been under pilot testing for several years. Under these programs, the United States, Netherlands, Norway, and other industrial-country governments, together with private-sector partners, have pursued carbon offset and sequestration projects in transitional-economy and developing countries -- mostly in Eastern Europe and Central America. As of April 1997, there were 101 such pilot projects under way worldwide; 36 of these involved renewable energy, while most of the rest focused on energy efficiency and tree planting.³³

Article 6 of the Kyoto Protocol officially authorizes joint implementation between Annex I countries, and allows parties investing in such projects to receive transferable credits. It lets these nations "transfer to, or acquire from, any other such Party emission reduction units resulting from projects aimed at reducing anthropogenic emissions."³⁴ Such bilateral trading is intended primarily to allow western nations to invest in projects to upgrade the woefully inefficient power plants, factories, and district heating plants in Eastern Europe. But renewable energy projects also qualify for such reduction units, and could prove popular in cases where they are relatively low-cost. It remains to be seen how popular such projects will be, however, given the availability of other forms of emissions trading in the protocol.

Another vehicle for generating tradable credits under the protocol is the Clean Development Mechanism (CDM). Potentially one of the protocol's most crucial developments for renewables, the CDM is a multilateral financial mechanism intended to yield "project activities resulting in certified emission reductions [in developing countries]."³⁵ Originally proposed by Brazil as a penalty fund paid into by industrial countries that fail to meet emissions targets, the mechanism attracted the interest of the Clinton administration as a means of responding to Senate pressure to stimulate greater developing-country participation in the protocol.

Bridging the two concepts, the CDM evolved in Kyoto into a means of financing emissions reductions or offsets in developing countries while stimulating economic development and yielding emissions credits that industrial -- and eventually developing -- countries can apply against their emissions obligations. The final version of the CDM may be particularly useful to renewables developers since, unlike other forms of trading, the CDM "may involve private and/or public entities."³⁶ Large-scale purchase of such credits would likely be contingent, however, on a decision by the U.S. government to impose tradable domestic emission limits, a concept now being widely discussed in Washington but not yet formally proposed. Under such a system, Enron, for example, might build a wind farm in China, generating emissions credits that could be sold to a U.S. oil refiner that is over its domestic emissions limit. Moreover, the protocol indicates that such projects can begin as early as 2000.

Despite this ambitious timetable, the protocol contains only the outlines of the CDM, and discussions since Kyoto indicate a range of opinions on how it will function. Generally, developing countries view the CDM as a quasi-public mutual fund while U.S. interests envision it as the certification body of a purely private trading system. The structure and function of the CDM are among the most crucial issues to be addressed at the Fourth Conference of the Parties to the climate treaty in November 1998, though decisions on these issues may well take longer.³⁷ In addition, it appears likely that domestic legislation will be needed in order to encourage widespread private-sector participation in any kind of international emissions trading.

As of mid-June 1998, 40 countries -- accounting for 39% of Annex I countries' carbon emissions in 1990 -- had signed the Kyoto Protocol.³⁸ The signatures are little more than formalities. The more crucial test is ratification, which brings the protocol legally into force on the ninetieth day after the date on which at least 55 Annex I countries, representing at least 55% of this group's carbon emissions in 1990, have ratified it.³⁹ Ratification in the United States faces a rocky road. With 36% of the 1990 Annex I emissions, the United States technically cannot block other industrial countries from putting the protocol into force, but Europe and Japan may well refrain from ratifying it themselves if the world's largest emitter -- and their strongest economic competitor -- appears unlikely to do so.⁴⁰ Some of these issues may be worked out at the November meeting in Buenos Aires, but full implementation of the protocol is likely to take considerably longer. Even so, renewable energy developers and advocates may see some effects of the Kyoto Protocol almost immediately.

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