The United States’ resistance to ratify the Kyoto Protocol and the introduction of state and regional regulations rather than national carbon market have limited US activity in the global carbon market. However, the development of a voluntary carbon market in the US has occurred to compensate for the lack of a national, regulated carbon market. The US has been driving the global voluntary carbon market supplying the majority of voluntary carbon credits and providing the largest source of demand (Ecosystem market place, May 2009). Though the US voluntary carbon market has grown substantially to reach a transaction level of nearly 84 million tons in 2008, it accounted for only 3% of the transaction volume of EU Emissions Trading Scheme (EU ETS). In addition to the voluntary carbon market, a development of voluntary market for renewable energy as well as energy saving projects, indirectly supporting carbon emissions reduction, has taken place in the United States. While small on a global scale, these voluntary efforts have had a positive effect on carbon reduction and policy change in the United States.

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Over the past 10 years, US political leaders have played only a minor role in the global carbon offset market, changing their views about climate change and global warming with each new administration. Once a forerunner of the Climate Change Conference held in Kyoto, Japan in 1997, the United States failed to stay on the track, allowing the European countries to drive the development of a carbon offset market.

In the 1990s, the Clinton administration was involved in the crafting of the Kyoto Protocol, proposing the Joint Implementation Scheme to encourage international partnerships to enable low-cost reduction in greenhouse gas (GHG) emissions. Though the Clinton administration supported the Kyoto Protocol, it was not submitted for ratification after the Republican-led Senate made a statement that it would not ratify any treaty which did not include binding targets for developing nations expecting to be responsible for the majority of emissions in the future.

During the U.S. presidential campaign in 2000, George W. Bush promised to set mandatory targets for the reduction of CO2 emissions but expressed his reservation about participation in the Kyoto Protocol.(Dietrich, 2005) Later as president, he did not introduce domestic CO2 reduction targets. The U.S. also pulled out of the Kyoto Protocol discussions, with the Bush administration stating that the Protocol did not impose compliance on the countries responsible for the majority of CO2 emissions globally, and therefore, participation in such treaty could only cause serious harm to the US economy. The Bush administration also emphasized the importance of further scientific research about global warming, and proposed the use of alternative energy sources and “market-based incentives” such as a voluntary approach and energy-efficiency programs to reduce GHG emissions.(Dietrich, 2005)

The Kyoto Protocol required ratification by 50 nations in order for it to be recognized as a major international agreement according to United Nations. After Russia ratified the agreement in 2004, the Kyoto Protocol entered into force in 2005 without any reliance on US support. The Bush administration stayed isolated from the global debate on climate change throughout its eight-year term, continuing to favor an “aspirational” approach instead of mandatory CO2 caps to combat climate change. (Bohan, 2007).

President Barack Obama has been very outspoken about the importance of US involvement in climate change issues and the development of national regulations to reduce GHG emissions, lower energy consumption and accelerate the adoption of alternative energy technologies. However, Obama was not always supportive of the Kyoto Protocol. In 1998, as an Illinois senator, he voted for the bill condemning the Kyoto treaty and disapproving GHG emissions regulations in the state of Illinois to protect the coal industry, as Dilanian (2008) conveys in his article “Obama shifts stance on environmental issues”. The article states that Obama continued expressing his favoritism towards the coal industry during his election to the U.S. Senate in 2004 proclaiming that “there’s always going to be a role for coal” in Illinois. Dilanian (2008) points out that during Obama’s campaign for president, he addressed his opposition towards the bill by saying that the Kyoto treaty did not have “meaningful and achievable emissions targets,” and that he “did not believe that state agencies in Illinois should unilaterally take steps to implement a global policy on their own …”

However, in the U.S. Senate Barack Obama showed his favor towards environmental friendly policies by opposing then-President Bush’s air-pollution proposal for relaxing federal air pollution control restrictions. Although Obama continued sponsoring bills that provided coal subsidies, he shifted towards broader public interest the closer he moved towards the presidential elections.

In October 2007, Senator Barack Obama presented a plan to decrease the US dependence on foreign oil and fight global warming with a national “cap and trade” system across the economy to reduce greenhouse gas emissions including an auction system requiring power companies and other energy-intensive industries to pay for their pollution. He continued to encourage mandatory policies throughout his presidential campaign.

Thanks to growing global awareness of climate change issues and Obama’s emphasis on low carbon economy, the United States now is actively pursuing implementation of enforced reductions for GHG emissions and stronger energy efficiency legislation. As a result, the U.S. House of Representatives recently passed the Waxman-Markey bill (also known as American Clean Energy and Security Act - ACES) as a first step towards a regulated carbon market. The new legislation proposes national energy efficiency targets for residential and commercial buildings as well as a cap-and-trade mechanism mandating a reduction of 2005 emissions levels by 20% by 2020. The cap-and-trade system is set up to regulate carbon allowances and offsets for electric utilities and other energy-intensive industries. The Obama administration has repeatedly promised to pass federal legislation that would limit CO2 emissions in the United States, and continues to pressure the Senate to follow the House’s lead - emphasizing that the Waxman-Markey bill would create jobs, lower the cost of renewable energy and reduce oil dependency. In his speech at the first meeting of the Strategic Economic Dialogue between the United States and China on July 27, President Obama stressed the importance of the cooperation of world’s two largest emitters of greenhouse gases on climate issues.

The Kyoto Protocol expires in 2012. This December 2009, the UN and international government officials will meet in Copenhagen (UNFCCC COP15) to discuss the final details of a new climate agreement. The Obama administration plans to be actively involved in the negotiations of a new treaty trying to regain leadership in the international climate debate.  It remains to be seen whether Obama will act upon his words to become national and international leader in the fight against climate change.

The past resistance of the US government to establish national carbon reduction targets and to participate in the Kyoto Protocol has significantly slowed down the development of a carbon market in the United States. The next posting will describe how the carbon market has developed in the US in light of the resistance of the US government.

At a recent conference called, “Navigating the American Carbon World Conference and Trade Fair” sponsored by Point Carbon and IETA, PG & E,  April 1-3 2009. San Diego, California, there was a consistent general tone to the presentations on the importance of doing something about Climate Change, how little time we have to do it in and how the global community including the developing world must come together for a Post 2012 Climate Change Agreement in Copenhagen 2009. There was broad consensus from all speakers such as, Janet Pearce, Vice President, Markets and Business Strategy, Pew Center, Carl Pope, Executive Director Sierra Club, Nancy McFadden PG& E,  to firm targets for the next commitment period 2012-2017, followed by a series of rolling interim targets with a firm long term 2050 target for the U.S and the rest of the world.

It is expected that the U.S will join the Annex 1, first world Kyoto countries and take on an absolute Cap of greenhouse gas emission of 60-80% below 1990 levels by 2050. However, U.S presenters are very artful and one notices that U.S speakers never actually state that the U.S will ratify the Post 2012 Climate Change agreement without mentioning in the same breath, the need for a commitment to targets by the developing world.

Nancy Sutley, Whitehouse Council on Environmental Quality, raised the question of engaging with the BRIC (Brazil, Russia, India and China) nations on sector targets for developing countries. IETA (The international Emissions Trading Association) also discussed giving BRIC nations sector caps, in other words targets on specific industry sectors, which would expand over time to include more sectors. An example of a sector cap, which was often cited was the cement sector in China. Sector Caps for developing countries seems to be the compromise solution to allow the U.S. Congress to agree to an international agreement and not to be seen to be letting U.S competitors off the hook. My concern is what happens if the developing world does not agree to any kind of cap on emissions including sector caps, where does that leave the U.S?

Today, The Obama administration is convening a meeting of 17 major nations April 27-28 in Washington to begin talks on international action to address climate change. The talks are a prelude to the December UN meeting in Copenhagen to create a new global treaty on Climate Chane. These talks confirm the U.S position, which is to insist on greenhouse gas caps on developing countries. The meeting underway in Washington includes nations responsible for 75 percent of the world’s carbon emissions and includes Western European countries, Japan, South Korea, Brazil, China, India, Indonesia and Mexico. Michael Froman, Deputy National Security Adviser for International Economic Affairs, told journalists April 24 at the State Department’s Foreign Press Center, “We believe that it is critical that those 17 be able to make progress on the outstanding issues and reach political consensus if there is to be to a deal in Copenhagen”.

The issues under discussion in Washington this week were discussed at an IETA hosted side-event, “Making Markets Work for the Environment” at the Point Carbon Conference in San Diego earlier this month. IETA released a document on “Principles for a Post 2012 International Climate Change Agreement”, which captures the key debating points around the Post 2012 Climate Change Agreement under discussion in Washington.

IETA recommended that the parties agree to:

- Firm targets for the next commitment period 2012-2017 followed by a series of rolling interim targets with a firm long term 2050 target. (They did not specify the actual target).

- Longer commitment periods of 8 years not 5 to provide predicatability and certainty for business decisions.

- Support for differentiated targets for Annex 1 nations and new forms of commitment such as sectoral caps for BRIC nations. IETA stressed that criteria for differentiation needs to be clearly elaborated including ways in which non Annex 1, developing countries such as China and India can move to Annex 1 mid-period - a pathway for all nations to move to the higher standard of commitment.

- Develop long-term standardized global network of Inventories and Monitoring, Reporting and Verification systems (MRV). Indira Balkinson and Barbara TooleO’Neil of DNV raised the necessity for 3rd party independent validation at the Point Carbon conference. It is not practical diplomatically for the U.S EPA to audit overseas credits it is better to be done by independent validators.

IETA countered U.S criticism of Emissions Trading and the flexible mechanisms by stating the need to focus on the provision of a global carbon market that facilitates trading between private entities and Parties as a pillar of the next Climate Change Agreement.

IETA Supported:

- The existing Flexible Mechanisms: Emissions Trading, the Clean Development Mechanism (CDM), and Joint Implementation (JI), which has been the key to jump starting emission reduction activities as well as facilitating the flow of technology. (Currently, CDM allows for credits generated in a developing nation to be sold into a capped nation like the EU as a means to meet it’s cap). IETA supports continued access to CDM for developing countries without a sector cap or  for un-capped sectors, which would cover most developing countries and most sectors. CDM credits, (CERs) serve as a linkage between regional trading systems, a crucial function until a global direct linkage has occured.  Interestingly, Steven Messner of SAIC showed a slide that indicated without domestic or international CDM offsets, the price of carbon would double in the U.S., showing that purchasing CDM credits by the U.S. would reduce the cost of cutting carbon. U,S criticism of CDM is based on the notion that it involves transfer of U.S.D and technologies to developing countries like China, which is why the U.S argues for developing country caps.

- IETA indicated that a JI like mechanism, (trading between two capped nations) would become more important in a post 2012 international Climate Change Agreement as more countries would have caps.

-IETA also indicated that domestic offset projects will become a complement to Cap and Trade regimes, as they promote emission reduction within those Parties economies. There are numerous opportunities to enhance the use of domestic offsets alongside more traditional cap and trade mechanisms, particularly in areas such as forestry, agriculture, land-use change and waste. The discussion indicated that some European countries that did not allow domestic offsets in the 1st commitment period such as France and Germany were interested in domestic offsets to drive private sector activity, jobs and technology uptake.

- IETA supported the transferability of the existing carbon market projects in process through the CDM/JI to domestic offsets as new nations formally adopt emission limitations.

I found myself agreeing with the points made by IETA and suggest further reading of their material. In summary they are arguing for all existing and future market mechanisms, which have the explicit intention of attracting private sector investment to create a secure investment environment with clear rules for participation and crediting and to use the market to create the most effective way for the private sector to participate in the Post 2012 Climate Change Agreement.

The Office of Economic and Workforce Development for the city of San Francisco is sponsoring a Carbon Collaborative on February 18/19th 2009. The Carbon Collaborative will explore opportunities to accelerate local economic activity within emerging environmental markets. Key areas of focus for this initiative include
emissions trading, emissions reduction project development, project verification and certification, and climate policy. The purpose of this exploration is to identify opportunities that will further establish San Francisco as a dominant center of activity within the coming low-carbon economy.

For Further Information contact the City of San Francisco,

Office of Economic & Workforce
Development
City Hall, Room 436
1 Dr. Carlton B. Goodlett Place
San Francisco CA 94102