Grenoble Graduate School of Business Business Ethics

The Kyoto Protocol

Patrick Petit

Business Ethics
August 2008

Purpose: outline the rationale behind and the main provisions of the Kyoto Protocol on climate
change for both developed and less developed countries and critically assess the effectiveness of the
Treaty.

Program Lecturer: Patrick O'Sullivan Professor at Grenoble Graduate School of Business

Number of words including references: 2960

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Introduction
There is an undisputed observation of an ongoing climate change resulting from global warning.
Evidences are reported in the latest Climate Change 2007 Summary Report from the
Intergovernmental Panel of Climate Change (IPCC), which highlights significant increases in global
average air and ocean temperatures, widespread melting of snow and ice and rising global average
sea levels since the second half of the 20th century. The report also shows observational evidences
from all continents and most oceans that many natural systems are being affected by regional
climate changes, particularly temperature increases (IPCC, 2007). Climate change resulting from
global warming is amongst the most important global environmental risks known today. It could
lead to potentially dramatic impacts on human health, food availability and security, economic
activity, water resources and physical infrastructures, which altogether may deeply affect future
generations.
According to the community of experts reporting to the IPCC, the increase in global average
temperatures since the mid-20th century is very likely due to the observed increase in the so-called
Greenhouse Gases emissions (GHG), which have grown by 70% between 1970 and 2004 (IPCC,
2007). Amongst those anthropogenic gases, carbon dioxide (CO2), resulting from the burning of
fossil fuels (coal, oil and gas) is the most important. However, the impact of anthropogenic carbon
dioxide emissions on global climate has not been firmly proved (Evans, 2008). This unfortunate
lack of evidence contrasts with the fact that fossil fuels are needed for economic activities as the
world's major source of energy. In other words, restrictions of CO2 emissions are somehow
considered by certain parties as irrelevant measures in addition to being incompatible with
economic growth.

The Kyoto Protocol is an international agreement linked to the United Nations Framework
Convention on Climate Change (UNFCC). Proponents of the Kyoto Protocol believe that limiting
climate change implies taking a range of radical domestic actions to reduce GHG concentrations
through investment, technology and infrastructural developments, and behavior patterns. In an
attempt to grapple with that problem that is unique in scope, nature and implications, the Kyoto
Protocol has introduced a range of mechanisms that are without precedent in the history of
international affairs (Grubb, 1999) and (Grubb, 2000).

The major distinction between the Kyoto Protocol and the UNFCC is that while the Convention
encourages industrialized countries to stabilize GHG emissions, the Protocol commits ratifying
countries to do so. However, the United States - known as the biggest polluter on the planet – has
never ratified the treaty, and rapidly-growing developing countries like China are not required to
make cuts on their GHG emissions. If climate change policies were translated into universally-
regulatory constraints applicable to all developed countries, the problem for industries to comply
with the treaty would be one of regulatory compliance, whereas the issue with the treaty today
concerns the business ethics attitude of some industries and policy makers in the absence of
international laws. But even in the absence of laws, the fact that global warming is recognized as
very serious issue by many governments, civil society actors, increasing numbers amongst the
public, as well as many in the business community, creates a situation of pressure, which suggests
that the opponents to the treaty should look at the issue not solely from the point of view of
business, but look towards the development of local regulatory processes that are more in line with
the environmental and societal concerns.

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Overview of the Kyoto Protocol

This section is based on the excellent overview of the Kyoto Protocol that is available on the web
site of the United Nations Framework Convention on Climate Change (UNFCC, n.d.).
The Kyoto Protocol is an international agreement linked to the United Nations Framework
Convention on Climate Change (UNFCC). The major feature of the Kyoto Protocol is that it sets
binding targets for 36 industrialized countries and the European Community for reducing
greenhouse gas emissions representing over 61.6% of emissions from those countries listed in
Annex I 1.
Recognizing that developed countries are principally responsible for the current high levels of GHG
emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol
places a heavier burden on developed nations under the principle of “common but differentiated
responsibilities.”
The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakech in
2001, and are called the “Marrakech Accords.”
The Kyoto Protocol is generally seen as an important first step towards a truly global emission
reduction regime that will stabilize GHG emissions, and provides the essential architecture for any
future international agreement on climate change.
By the end of the first commitment period of the Kyoto Protocol in 2012, a new international
framework needs to have been negotiated and ratified to deliver GHG emission reduction objectives
that the Intergovernmental Panel on Climate Change (IPCC) has deemed necessary.

Implementation mechanisms
Countries with a GHG emission-reduction or emission-limitation commitment under the Kyoto
Protocol (Annex B Parties), will have to meet their targets primarily through national measures.
However, the Kyoto Protocol offers them additional means of meeting their targets by way of three
market-based mechanisms.
The Kyoto mechanisms are:
● Emissions trading known as “the carbon market" allows Annex B Parties who have emission
units to spare (emissions permitted but not produced) to sell this excess capacity to countries
that are over their local target limits.
● Clean Development Mechanism (CDM) allows Annex B Parties to implement an emission-
reduction project in developing countries. Such projects can earn certified emission
reduction (CER) credits (each equivalent to one ton of CO2), which can be sold or counted
towards meeting their local targets.
● Joint Implementation (JI) is a mechanism by which Annex B Parties can earn emission
reduction units (ERUs) from an emission-reduction or emission-removal project in another
Annex B Party, each equivalent to one ton of CO2, which can be counted towards meeting
their local targets.
In these mechanisms, the protocol sees facilitating tools that should stimulate green investment and
help countries to meet their emission targets in a cost-effective way.

1 These amounts to an average of five per cent against 1990 levels of GHG over the five-year period 2008-2012

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Monitoring emission targets

Under the Protocol, actual emissions have to be monitored and precise records have to be kept of
the trades being carried out under the mechanisms described above.
● Registry systems track and record transactions by Parties under the mechanisms. The UN
Climate Change Secretariat, based in Bonn, Germany, keeps an international transaction log
to verify that transactions are consistent with the rules of the Protocol.
● Reporting is done by Parties by way of submitting annual emission inventories and national
reports under the Protocol at regular intervals.
● A compliance system ensures that Parties are meeting their commitments and helps them to
meet their commitments if they have problems doing so.
● Adaptation. The Kyoto Protocol, like the Convention, is also designed to assist countries in
adapting to the adverse effects of climate change. It facilitates the development and
deployment of techniques that can help increase resilience to the impacts of climate change.
● The Adaptation Fund was established to finance adaptation projects - to assist countries in
adapting to the adverse effects of climate change - and programs in developing countries
that are Parties to the Kyoto Protocol. The Fund is mainly financed by a share of proceeds
from CDM project activities.

Enforcement
If the Enforcement Branch determines that an Annex B Party is not in compliance with its
emissions limitation, then that country is required to make up the difference plus an additional 30%.
In addition, that country will be suspended from making transfers under an emissions trading
program.

Implementation Effectiveness
Lots of international dissensions have been surrounding the Kyoto Protocol since its inception.
These dissensions have been stressing out the importance that governments attach to having
mechanisms that are perceived to be fair, efficient, and not detrimental to economies (Grubb,
1998). To date, 137 developing countries have ratified the protocol, including Brazil, China and
India, but these developing countries have no obligation beyond those of monitoring and reporting
GHG emissions. The United States - one of the most significant GHG emitters, representing 36% of
Annex 1 CO2 emissions countries - has not ratified the treaty (UNFCCC, n.d.). In a White House
allocution in June 2001, President Bush said: “Kyoto is, in many ways, unrealistic. [...] For
America, complying with those mandates would have a negative economic impact” (Bush, 2001).
Also, China as the world's second-largest emitter of GHG, is entirely exempted from the
requirements of the Kyoto Protocol. According to some economists and climate scientists
(Mendelsohm 2005), (Powell 2004), (Evans 2008), (Maclean's 2006), (Grubb 1998), self-interest
alone did not lead the United States to reject the Kyoto protocol. There exists a broadly-shared
concern that the treaty is highly inefficient and inequitable. Amongst the main concerns cited
throughout the literature one can highlight the following arguments:

● The treaty sets targets for GHG emissions for each participating country based on its 1990
emission levels. However, countries like the United States, which have grown considerably

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since 1990, are more penalized than other countries which haven't. In particular, Western
Europe has cleverly aligned itself with its eastward enlargement to take advantage of the
declines in emissions in Eastern Europe. Taking Europe as a whole, the region must reduce
emissions only a few percent to reach its Kyoto targets while the United States would have
to reduce emissions by almost 30 percent to reach its Kyoto targets.
● Developing countries like China and India are exempt from any reduction obligations. Yet
they are significant contributors to GHG emissions now and will be even more in the future.
For many opponents to the treaty, every country should be part of the agreement for the
Protocol to be effective in the long run, and that most definitely includes developing
countries such as China and India. In other words, the approaches of the treaty to solve a
global problem does not include the right countries.
● Investments to comply with the treaty require very expensive capital investments in a
country's capital stock including buildings, power plants and factories, which cannot be
seriously planned outside of a long-term, global and firmly-placed treaty engaging all
nations of the world. Also, for industrial countries like the United States, implementing the
protocol in a four-year timeframe costs too much in too-short a timeframe.
● Supporters and skeptics of the Protocol alike agree that the treaty will not solve the climate
problem since the nations who've signed it represent just 30 percent of the world's carbon
dioxide emissions, 34 percent of the world's gross domestic product, and just 13 percent of
the world's population (Powell, 2004). The bottom line is that its environmental benefits are
probably not worth the cost.
● Emissions trading, in terms of specific mechanisms for implementing quantitative
commitments, is pivotal to the Kyoto Protocol concepts (Grubb, 1998). However, it is
broadly believed that local interests within governments and industries seek to maximize the
economic benefits they can obtain from using this mechanism. Russia for instance, after a
decade of economic decline2, is allowed to sell emission credits on the carbon market to
nations that are exceeding their quotas, netting Russia between $7 billion and $32 billion in
the coming years (Powel 2004). Emissions trading raises the question of the actor's good
faith because it is unclear whether emission trading is being used in ways that protect the
atmosphere or in ways that protect economic and political interests at the environment's
expense.

An Ethical Dilemma
I think that when Stavins said in (Powell, 2004) that “both Russia and the United States did the right
thing according to their national interests, with Russia accepting the treaty and the U.S. rejecting
it.“, he overlooked the true ethical dilemma dimensions that surround the treaty. Business ethics is
about the relation between business and society. As with any relation, this one may be looked at
from two points of view. From the point of view of business, the role of the industry is to engage in
profitable activities. From the point of view of society, industry is embedded in society and its
activities are socially legitimate to the extent that they not be detrimental to society as a whole.
Situations in which industrial activities lead to profit for the business actors but is detrimental to the
society as a whole, require the actors, whether they be corporations or policy makers, to make
difficult choices relative to ethical dilemmas. The respective positions of the United States and the
European Union with regard to the ratification, has shown two different business ethic attitudes

2Russia's target carbon dioxide emissions based on 1990 were higher than current emissions

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towards the global warming issue. They have contrasted those in which priority is put on reaching
the best consequence (or avoiding the adverse economical effects) for the business actors, and those
in which priority is put on supporting a process that is in line with societal concerns. The United
States may have avoided the economical penalty incurred through committing to the treaty, but they
have lost tremendously on the grounds of a moral authority figure committed to universal values,
including environmental stewardship to the profit of the European Union. Anti-Americanism was
already on the rise in "old Europe" because of Bush's policies on Iraq. United States resistance to
action on global warming only solidifies America's image abroad as a nation of parochial, selfish
and wasteful SUV drivers (Purvis, 2004). Finally, the United States' policy not to comply with
Kyoto may eventually backfire on its economy even harder than if they had committed to reducing
domestic GHG concentrations in the first place. Kyoto makes it more likely that over the next
decade Europe and other committed countries will use trade policies to push the United States
towards stronger climate action. For those countries, one of the main concerns is that their domestic
industries are at a relative disadvantage compared to producers in countries that do not take
similarly strong action. One policy option that has been repeatedly proposed to deal with such
challenges is border carbon adjustment (BCA), a trade measure that would try to level the playing
field between domestic producers facing costly climate change measures and foreign producers
facing very few. It has been proposed to date that the BCA work in conjunction with either a
domestic carbon tax or a cap-and-trade scheme. In the case of a carbon tax, a BCA would charge
imported goods the equivalent of what they would have had to pay had they been produced
domestically, in the manner of a border tax adjustment. Such a scheme might also rebate the paid
tax to exporters, ensuring that they are not disadvantaged in international markets. In the case of a
cap-and-trade scheme, a BCA would force domestic importers or foreign exporters of goods to buy
emission permits based on the amount of carbon emitted in the production process, in a requirement
analogous to that faced by domestic producers (Cosbey, 2008). To that aim, the French President,
Nicolas Sarkozy, whose has been presiding the EU since July 2008, called for a national carbon tax
on global-warming pollutants and a European levy on imports from countries outside the Kyoto
Protocol (AFP, 2007).

References

AFP, (2007), Climate change: Sarkozy backs carbon tax, EU levy on non-Kyoto imports, Oct 25,
2007, Available online at http://afp.google.com/article/ALeqM5gx9Wyuo7XJiydxsqseJmVdX3-
MoQ
Bush, G., W., (2001), President Bush Discusses Global Climate Change, White House Office of the
Press Secretary, June 11, 2008, Available online at
http://www.whitehouse.gov/news/releases/2001/06/20010611-2.html, [September 1, 2008]
Cosbey, A., (2008) Border Carbon Adjustment , June 2008, International Institute for Sustainable
Development, Available online at
http://www.google.fr/url?sa=t&source=web&ct=res&cd=3&url=http%3A%2F%2Fwww.cop15.dk
%2FNR%2Frdonlyres%2F70083E4D-80B4-473D-B9F8-
B9F736488F93%2F0%2FBorderTaxAdjustment.pdf&ei=Yne-
SPLgK4_cwgHKkt3tDw&usg=AFQjCNE0VMA8aa-
msbE4NvikoD6DbURFyg&sig2=R2DI3uYjo5urTqVeBTGrog
Evans, D., (2008), No smoking hot spot, The Australian, July 18, 2008

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Grubb, M., (1998) International Emissions Trading under the Kyoto Protocol: Core Issues In
Implementation. Review of European Community & International Environmental Law, 1998, Vol. 7
Issue 2
Grubb, M., Vrolijk, C., Brack, D., (1999), The Kyoto Protocol – A Guide and Assessment. London:
The Royal Institute of International Affairs/Earthscan.
Grubb, M., (2000), Economic dimensions of the technological and global response to the Kyoto
protocol, Journal of Economic Studies, Vol. 27, pp. 111-125, MCB University Press
IPCC, 2007, ‘Climate Change 2007: Synthesis Report, available at:
http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr_spm.pdf, [September 3, 2008]
Maclean's, 2006, Being Kyoto-Compliant Without Even Trying, 11/27/2006, Vol. 119 Issue 47,
p22-22
Mendelsohn, R., O., Ph.D, (2005), An Economist's View of the Kyoto Climate Treaty, NPR.org,
February 18, 2005, Available online at:
http://www.npr.org/templates/story/story.php?storyId=4504298, [September 2, 2008]
Powell, A., (2004), Debate over Kyoto climate treaty heats up at KSG, December 02, 2004, Harvard
News Office, Available online at http://www.hno.harvard.edu/gazette/2004/12.02/05-warm.html,
[September 3, 2008]
Purvis, N., (2004), The Real Importance of the Kyoto Treaty, 15 December 2004, Brookings:
International Herald Tribune, Available online at
http://www.brookings.edu/opinions/2004/1215energy_purvis.aspx, [September 3, 2008]
UNFCCC, (n.d.), The Kyoto Protocol, [online], Available at
http://unfccc.int/kyoto_protocol/items/2830.php, [August 24, 2008]

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