California has announced that it intends to sell credits for greenhouse gas emission reductions created under its new "cap and trade" scheme to the European Union. In this extended treatment, Chris Horner, Counsel for the Cooler Heads Coalition, examines the ramifications of this announcement.

There are obvious political and technical problems with bringing such an agreement on line, but nothing that the Kyotophiles won't hook-or-crook their way thru, rules be damned, if not loudly called on it. So it is our duty in advance to ensure that at least the flaws, downsides (upsides) and motivations be in the public domain ab initio. This is particularly true now that the UNFCCC has floated the outrageous idea of postponing "post-2012" decisions until a more suitable US president is installed...blaming Bush's reluctance to join the sinking ship for their own inability to reduce emissions and to attract new members (Parties), which they absolutely must have, as a source of credits to buy, in order to have a Round II.

Structural and Political Problems

A glaring problem is that California is not an Annex I Party to the treaty, as is required by any of the relevant provisions for such transfer of emission reduction units (esp. Article 6). That is not a technicality; a series of requirements of Parties dictates their eligibility for various schemes, including the Art. 6 emissions trading provision. So, the frontal approach to setting up a scheme with California requires that the treaty be amended, with such amendment ratified by the requisite number of Parties pursuant to Kyoto's established procedures. We know this won't happen, as was clear at the Montreal COP when the Saudis proposed the (required, under Article 18) amendment to make Kyoto's penalties binding and enforceable. Canada and Europe objected by acknowledging that that is a difficult row to hoe as evidenced by the treaty's tortured path to effectiveness. As a dodge, they adopted a non-binding "Decision" claiming that Kyoto has binding penalties. So, as would be established at the first confrontation, Kyoto does not have binding penalties. This does not mean they could not try the same approach to somehow allow CA to accede to the Treaty in some capacity.

Or, CA should become a Party to Kyoto -- and we should ask Arnie, "hey, why not?". One reason is found in the Constitution and, who knows, they might obtain congressional approval. However, Congress has yet to step up and assert its constitutional role on any of these climate non-aggression pacts to date as required, so why should we assume they would here? (Of course, being a Party also requires CA to pour aid into various rat holes around the world. This is a good opportunity to point out this additional appeal of Kyoto.) The next problem to CA simply becoming an Annex I Party is that, despite the hype, CA's scheme promises such a radically different metric: 1990 levels by 2025 is certainly not the same as 8% (or choose your #, 7%) below 1990 by 2010. Simply incomparable. So, if this would make CA the Silicon Valley of windmills, why imagine what actually joining the first of 30 steps, not of 60, would do! I think we can rule out CA acceding to Kyoto, which would require it to immediately in essence double and fast-track its (supposedly) Kyoto-like promise. Or, it would require the rest of Kyoto's Parties to let in a slacker on easier terms. Sure! But I would beg the question.

So, CA cannot engage or be engaged under the trading scheme. How about JI (splitting credits for investments in other Annex I Parties, designed for Central and Eastern Europe)? Well, again, that's for Annex I Parties. CDM? CA is obviously not "a Party not included in Annex I", as required in Article 12, which is how the Treaty throughout refers to the 100+ free-riding, ratified Parties...again because they are not a Party. So, an option is for CA to accede to Kyoto but as a Party not included in Annex I, though this would serve them only to receive development projects, not "trade emissions." It is the latter the EU wants, and, again, we would see a green revolt if CA were treated like China and India under Kyoto.

How to get around these problems

So, the question remains: how in the world can Kyoto grant credit for buying credits from outside the system?

Here's how, and it's pretty cynical and worthy of mockery. Europe would seek to include CA as a "legal entity" authorized under Article 6.3, allowing "A Party included in Annex I [to] authorize legal entities to participate, under its responsibility, in actions leading to the generation, transfer or acquisition under this Article of emission reduction units".

So, California would join the EU or, officially for these purposes, become what I call it: Western Europe.

Why, Chris, those of you with intact memories are doubtless saying, isn't this precisely what you've suggested for years that California and any other state so pressed by its rent-seekers should just do to stop agitating for US involvement in Kyoto, and move on, show some initiative, self-sufficiency, and so on? Why, yes. Shut up about Washington holding you back from energy rationing and work it out yourselves. If you've got credits to sell, Europe needs you. You don't join the EU or Kyoto, and burden yourself with all of its baggage. You would instead be granted a "privileged partnership." You would become Turkey, with better plumbing.

There's more to the story: "supplementarity" rears its head

Please ponder the opportunities here: the greens and Europe see this as offering a way to slap Bush: The one sane State has effectively joined Europe for treaty purposes (again, for those who have read the Constitution...). In the meantime, this raises the issue we have given them all a free pass on, while they fight amongst themselves and the greens: "supplementarity," or the Article 6.1(d) requirement (repeated with some squishiness about what it means, in umpteen provisions and subsequent formal docs) that "The acquisition of emission reduction units shall be supplemental to domestic actions for the purposes of meeting commitments under Article 3."

On its face, the supplementarity requirement indicates that a Party must actually reduce at least half of its "reduction" requirement, and only buy the other half. The EU has weakened this to actual reductions must constitute a "significant" portion of the promise, and buy the rest. So be it.

But, what happens when you aren't reducing emissions at all, like nearly every EU country? Well, the EU then falls back on its Article 4 "bubble", under which the EU is now the Party to Kyoto, unless and until it fails to meet its 2008-2012 promise. At which point, per Article 4.5, each Member state is stuck with its individual promise made under the Burden Sharing Agreement (not their original promise of 8% below 1990, but what they superseded it with, which will really hurt in some cases (DK, DE), and be a lessening of the pain in others (ES, PT, GR, SW, FR).

What if, in fact, you intend to buy the entirety of your promise, as is the case in Europe given that all non-EU projections have them not just insufficiently reducing emissions, but increasing emissions Cf. 1990 by 2010? Further, what about those many EU states actually permitted to increase emissions? How do the particulars of the "supplementarity" requirement apply to them?

As usual, the answer is: with fudging. It seems apparent that the EU is moving toward claiming that "but for" whatever they've done domestically, emissions would have been...whatever is necessary to claim that they are significantly "reducing" (avoiding) emissions so as to remain eligible to trade (among themselves, w/CA, etc.), participate in CDM, and so on. That is how they will get around the "supplementarity" requirement.

In this context, outsourcing your reductions to a non-Party seems small beer. But supplementarity is a hook for us to point out how, yet again, there are no such things as rules for Europe when it comes to Kyoto. They've bent every single one presented, and broken a few more, on their inevitable march to climate victory.

This doesn't solve everything...yet

Yet, "supplementarity" fudging remains the biggest point of contention between the greens and the Kyoto establishment (not dissimilar to that in CA, where the greens are furious at Arnie for seeking to write emissions trading in as part of the law thru exec order). Supplementarity has not been resolved; the bad news is the greens know that unless they cave to ensure that whatever must be allowed to claim compliance will be allowed, then their pact is a dead letter. It ain't over, but we should make the point in the meantime that this is one more way Europe is cheating its way around the fairly plain requirement of "supplementarity": by outsourcing its emission "reductions" to the US! The US saves Europe on Kyoto, as they always knew it would...if not precisely how they expected. [actually, the more one can outsource cuts the better of course from most of our perspectives, were we to find ourselves caught in such a boondoggle; but that's neither here nor there].

I admit being puzzled by this: Does CA really think it has credits to sell?

This is being driven so far as I can tell by two camps: 1) Europe, which desperately needs a) credits and b) to save face and even crow about some quasi-anti-Bush victory; and 2) those putative credit-selling CA businesses angry over not having won the bet on "early action" credits, who can now institute a program that, if they pull it off, seems designed to raise the cost of their credits.

-- Chris Horner