Brian Fallow: With Kyoto it's the journey that counts

It is easy to be cynical about the Kyoto Protocol, which came into force yesterday.

Most developed countries have signed up but the United States, which accounts for about a quarter of global man-made emissions of greenhouse gases, is not among them. Nor is its loyal sidekick, Australia.

Developing countries undertake no obligations under the protocol, yet they are expected to overtake the developed world in annual emissions within the next 20 years.

And the targeted reduction in emissions for Kyoto's first commitment period, 2008 to 2012, would make only a small dent in atmospheric levels of greenhouse gases. The environmental impact, in short, would be negligible.

So why bother?

Well, it's a start.

What fundamentally divides Kyoto supporters and sceptics is the question of whether a world of nation states with huge disparities of wealth and short electoral cycles can get its collective act together in the face of a challenge on the scale of global climate change.

It's called the tragedy of the commons. As with the over-grazing of communal land, if most people pursue their short-term self-interest to the full and hope to free-ride on the restraint of others, everyone in the end is worse off.

Excruciatingly difficult as it it, the multilateral process which gave rise to Kyoto looks like the best chance of avoiding that. Policies grounded in international undertakings are generally more durable and less hostage to changes of government.

In other words, it is the Kyoto process, rather than its first harvest in terms of outcomes, that matters.

After all, the trade liberalising fruits of the first General Agreement on Tariffs and Trade in the late 1940s were probably pretty meagre as well. But it was a start and more than half a century later globalisation is a fact and GATT's successor, the World Trade Organisation, is a forum no one can ignore.

But clearly there is a risk that having got laboriously to its feet and taken this small first step towards not leaving future generations a dry-roasted planet, the international community falls flat on its face again

If the largest emitter, the US, and the fastest growing, China, refuse to lift a finger on this issue, that degree of free-riding will make it hard, if not impossible, to enlarge the reach and deepen the impact of Kyoto beyond 2012. There may not even be a second commitment period.

But there is a bigger free rider problem here.

The environmental costs of greenhouse gas emissions by and large do not fall on those who are responsible for them. They are diffused over the whole planet and will vary from place to place.

And there is a lot of inertia in the system, making for very long lags between changes in what we do to the atmosphere and changes in what the climate does back.

Because carbon dioxide molecules persist in the atmosphere on average for more than a century before moving on to the next phase of the carbon cycle, the effects of today's emissions will be felt for generations.

Knowing this, the status quo is a kind of tacit conspiracy between the producers and the consumers of fossil fuels to dump the cost on to third parties far away or yet unborn.

You might call it a subsidy from poor countries to rich ones and from future generations to the present. Being on the receiving end, we naturally don't want that to end.

But is it wise to bet the farm that it never will?

If you think the laws of nature will eventually compel us into a low-emissions future in which there is no longer an untrammelled right to dump greenhouse gases in the atmosphere, surely it makes sense to begin that promptly and gently rather than do nothing and face a more abrupt change later.

Then there are the commercial opportunities.

In a low-emission world, the demand for transport, electric power, comfortable ambient temperatures, industrial process heat, building materials and so on will not evaporate. These are not tiny niche markets.

There is a wide array of promising alternatives, in various stages of development, to succeed the incumbent technologies. Whoever commercially develops the eventual successors will make a fortune. That is more likely to occur in economies in which consumer energy prices are higher.

The way Kyoto is designed (ironically as a result of US advocacy) favours market mechanisms over regulatory fiat.

It is a cap-and-trade system which creates tradeable rights to emit greenhouse gases, along the lines of fishing quota. An international market (already up and running) sees that they flow to whomever values them most and should ensure that the most cost-effective measures to reduce emissions are taken at any given time, regardless of where that might be.

But unlike Europe, where an emission trading scheme at the level of industrial companies and utilities began in the new year, in New Zealand few firms will be able to participate in the carbon market. The exceptions are those that have successfully tendered for subsidies, peeled off the Government's wad of carbon credits, for climate-friendly projects that would not otherwise proceed.

The Government has not ruled out devolving emissions trading in the future but, in the meantime, the main policy instrument for transmitting the international price of carbon to New Zealand consumers will be through a tax on the carbon content of fossil fuels.

At world prices of about $15 a tonne of CO2, that would add around 4c a litre to the price of petrol and diesel and raise residential power prices by around 4 per cent.

Such faint price signals are unlikely to change behaviour much, at least on the part of smaller consumers, who have already taken in their stride surging world crude prices, big swings in the exchange rate and the electricity system's adjustment to the end of cheap Maui gas as its main thermal fuel.

Stronger signals will be needed.

New Zealand has agreed to limit the net amount by which it adds to atmospheric levels of greenhouse gases to 1990 levels on average between 2008 and 2012.

By 2002, gross emissions were running 22 per cent above 1990 levels. That is way above the average 8.4 per cent increase for Kyoto countries (excluding those of the former Soviet bloc, where emissions have fallen steeply), and the United States' 13 per cent rise.

The Climate Change Office estimates that on a business-as-usual basis emissions, mainly from car exhausts and belching ruminants, will be on average 30 per cent above 1990 levels during the first commitment period.

The Government is relying on the fact that that increase will be (on current estimates) almost exactly matched by credits for the carbon dioxide taken out of the atmosphere by trees growing in "Kyoto" forests, planted since 1990 on land not previously forested.

It still expects, Climate Change Minister Pete Hodgson says, to be a net seller of credits in the first commitment period. But the projected excess is all expected to come from reduced emissions as a result of policy measures such as the carbon tax, subsidies projects and the greenhouse agreements negotiated with a handful of large industrial emitters. That, of course, remains to be seen.

But even if we squeak through the first commitment period, the crunch is likely to come in the second - if there is one.

The rate as which new forests are being planted has dwindled, while plans to switch land use in the other direction (from trees to grass, incurring a debit under Kyoto's rules) are becoming more common.

To comply with more stringent targets post-2012, two prevailing trends will have to turn around: the rampant growth in emissions and the declining popularity of forestry as an investment.

If the Government expects the forest industry to continue to get us off the hook it is not good enough to cross its fingers and hope that relative commodity prices will change in way that encourages more planting. Given the importance of pastoral farming, that is a perverse thing to hope for.

If it makes sense to dole out carbon credits to incentivise wind farms and the like, surely it makes sense to dangle the same carrot before foresters.

And soon.