We can do better than Kyoto

By Jason Hayes
web posted September 2, 2002

The rhetoric surrounding Kyoto is reaching a fevered pitch and as environmentalists strain to see the accord ratified, their collective keyboards, printers, and presses are producing emissions faster than many Western nations. The majority of this mounting tide of green effluent demands, first the ratification of Kyoto and second a drastic change in our use and production of energy.

Notably lacking in the voluminous publications of Kyoto proponents is the recognition of the stability and financial security that the use of fossil fuels provides. Such stability is pivotal in that it allows the financing of research and corresponding increases in efficiency and improved environmental performance while still providing abundant, affordable, and secure energy. Published projections generated by the environmental lobby and an increasingly green federal government appear to take this stability for granted and ignore the impacts that reducing our use of fossil fuels will have on the Canadian economy and environment.

Furthermore, recent studies funded by vocal Kyoto advocates (such as the Canadian Climate Action Network, the David Suzuki Foundation, and the World Wildlife Fund) have actually asserted that the Canadian economy would benefit from the ratification of Kyoto by our federal government. In an interestingly optimistic forecast, Pembina Institute research (Boustie et al. 2002) claims that the constraints faced by Canadians under the Kyoto protocols would encourage unheard of levels of innovation in government and business, causing positive economic growth after Kyoto was ratified. Apparently innovation such as this would be impossible without the constraints of Kyoto.

Their logic is analogous to a right handed individual extolling the productivity increases they would achieve in learning to use their left hand, after purposefully cutting off a right hand that they irrationally viewed as diseased or dangerous. It purposefully ignores or downplays the significant loss of productivity that would be suffered in severing the (currently) more productive appendage. More importantly, it ignores the cumulative positive impact that could be had by learning to use the "safer" left hand while retaining and continuing to use, heal, and restrain the right.

This report (and others like it) relies on a misapplication of the notion of innovation. For example, it cites John Browne, Group Chief Executive of British Petroleum, and Michael Porter, Director of the Institute for Strategy and Competitiveness at the Harvard Business School in an apparent attempt to demonstrate that this Kyoto-based innovation will keep Canadian business competitive.

[W]e set our own target - to reduce our own emissions of greenhouse gases by 10 per cent from a 1990 base line by the year 2010. . . . Now, five years on, I'm delighted to announce that we've delivered on that target. . . . It came through a reduction in the amount of energy we need to use. . . . And we avoided unnecessary emissions. . . . And by applying simple efficiency - stopping leaks. . . . In aggregate the net effect of all those actions is that we've met the target, seven years ahead of schedule. And we've met it at no net economic cost - because the savings from reduced energy inputs and increased efficiency have outweighed all the expenditure involved.
- J. Browne

Only those companies that innovate successfully will win. A truly competitive industry is more likely to take up a new standard as a challenge and respond to it with innovation. An uncompetitive industry, on the other hand, may not be oriented toward innovation and thus may be tempted to fight all regulation.
- M. Porter

Both arguments are correct in noting that uncompetitive industries will resist change and that business which is disciplined and dedicated to innovative targets and plans can achieve major gains in efficiency. However, innovation as applied in the John Browne citation cannot be reasonably linked to either the Porter quote or the Canadian / Kyoto situation. In this instance Browne is recognizing the effectiveness of proactive, flexible, and self-imposed constraints, not the rigid and arbitrary constraints required by regulation. Furthermore, a thorough reading of Browne's entire statement (Browne 2002) and a similar statement he made at Stanford University one year prior (Browne 2001), shows that he specifically denigrates the use of "prescriptive regulation" and lauds the use of incentives and the beneficial effects of globalization and free trade. In this sense, Browne's full comments are at variance with Porter's notion that the ready acceptance of new regulations necessarily proves the existence of a "truly competitive" spirit.1

With emissions caps and or permit trading (both of which effectively act as carbon taxes - c.f. work by Dr. Ross McKitrick) suggested by the federal government as the primary means of achieving Kyoto emissions targets, it is clear that prescriptive regulation and disincentives, rather than freedom and incentives will be employed. In fact, Browne specifically noted in his 2002 presentation that a primary motivator for reducing emissions to 10 per cent below 1990 levels was an early recognition that "those targets or something similar would be converted into mandated objectives."

It is essential to recognize, that in applying the emissions reductions targets to their operations, British Petroleum remained flexible in the achievement of those goals. They had both personal and corporate buy-in to the targets. No such corporate buy in will exist in the implementation of Kyoto mandates, apart from the buy in of an industry forced to comply with ineffective legislation under threat of legal repercussions if emissions targets are not met. By sidestepping the influence of government, BP avoided the threat of retaliatory and punitive fines that will be present under Kyoto. Furthermore, they also managed to implement their reductions within the current framework (and relative freedom) of the Canadian and world economy. They were not operating under the restricted capital or resource flows that would be present after the implementation of Kyoto.

The Pembina study also attempts to discredit opposition to Kyoto by claiming that opponents "typically ignore or fail to mention" savings and new business opportunities derived from increased efficiency and innovation, the ability to pass costs on to suppliers or customers, the stability and facilitation of planning afforded by policy certainty, and the ability of flexible government policies to address the needs of vulnerable sectors or regions.

Unfortunately, their logic fails in each assertion.

First, any industry absolutely relies on the ability to save money and decrease emissions through increased efficiency and innovation. It is just this fact that has allowed fossil fuels to remain both economically attractive and increasingly environmentally benign. Stable, affordable, secure, and relatively benign energy sources will naturally command a large market share and provide numerous opportunities for Canadian business.

Secondly the Canadian fossil fuel industry cannot simply pass increased costs on to suppliers and customers, as they are "price takers", meaning their willingness to retain or sell their products has a negligible impact on world markets. Fossil fuel prices are set by producers with the lowest production and shipping costs. Ratification of Kyoto would place Canada in the unenviable position of being the only country in the Western Hemisphere required to meet the binding developmental constraints imposed by the accord; this will drive our production costs up.

The United States has opted out and the other countries in the western hemisphere have been classed as developing nations, meaning they are free from emissions reductions constraints. With their competitors in the world market untouched by Kyoto, Canadian companies will simply be priced out of the market or forced to bear the cost of Kyoto restrictions. Bearing the cost of Kyoto will make Canadian businesses less profitable, and therefore, less interesting to investors and capital funding causing a perverse cumulative negative impact. Additionally, the increased cost of operation will persuade businesses and their employees to locate in, or relocate to, the US or Mexico.

Thirdly, it is true that stability allows for effective planning. However, if that stability is gained only through massive cost increases and at the expense of an ability to compete, companies will plan to locate elsewhere. A more inviting stability could be had by implementing a long-term (US-style) plan to move emissions reductions forward.

Lastly, it is true that creative redistribution allows government to provide short-term fixes to the socio-economic damage caused by policies such as Kyoto. However, the Pembina report glosses over the fact that mitigation is only required to address the regressive impacts of the Kyoto protocol. Arguing for the benefits of government redress for vulnerable sectors, made vulnerable solely through the actions of government is nonsensical. Furthermore, in the long-term the ability of government to provide this redress will be greatly diminished in the face of decreasing tax revenues as profits decrease and businesses struggle to remain viable.

The attempt to show Kyoto as being beneficial to the Canadian economy exists as a unique and effective tool in the push to see the accord ratified. While the findings of the Pembina study undoubtedly related the author's desires regarding ratification, their mixing of unsettled science, illogical attempts to discredit opponents of Kyoto, and unusually optimistic assumptions of innovative ability makes the outlooks of the study somewhat suspect. Despite the assertions of various crises oriented lobbyists and bureaucrats, a reasoned review of the conflicting science and economic theories surrounding global warming, and more specifically the Kyoto Accord, cries out for prudence. Simply put, the science is not settled and assertions of a vast "consensus" do not a consensus make.

Although it will be difficult, the diversity of scientific, economic, and social views on global warming must be fully considered before the Canadian federal government rushes forward with ratification of Kyoto. If undertaken as an honest attempt to determine the best economic and environmental pathway to reducing greenhouse gas emissions, the Kyoto protocol will quickly be abandoned for long-term planning and achievable innovation and technological solutions.

Footnotes:

1 Porter's outlook on competitiveness and innovation, as cited by this study, appears to purposefully and fallaciously exclude all things, other than favorable reactions to increased regulation, from the class of things that may be considered innovative or competitive. Clearly, such a simplistic outlook is nonsensical as it renders all human innovation apart from government regulation as non-existent or meaningless.

Works Cited:

Boustie, S., M. Raynolds, and M. Bramley. 2002. How Ratifying the Kyoto
Protocol Will Benefit Canada's Competitiveness, a report prepared by the Pembina Institute for Appropriate Development for the Canadian Climate Action Network. Ottawa, ON.

Browne, J. 2001. A Progress Report. a speech given for the 2001 Conradin von Gugelberg Memorial Lecture on the Environment. Stanford University. Stanford, CA. 6 March.

Browne, J. 2002. Beyond Petroleum: Business and the Environment in the 21st Century. a speech given to the Stanford Graduate School of Business. British Petroleum. 11 March 2002.

Jason Hayes is a Calgary-based researcher and environmental / technology consultant.

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