Emerging Carbon Markets
and the Future of Climate Policy

Nathan E. Hultman

Until late October 2003, most observers had given up on the prospect of U.S. legislation addressing the emission of gases that contribute to climate change. Not only had President Bush summarily dismissed the Kyoto Protocol-the international community's first attempt to harmonize emissions reductions-as dead, but the last Senate vote on the issue unanimously demanded wider-ranging global participation than had been agreed to in U.N. negotiations. Thus, rather than attempt to engage either Congress or the Bush administration, attention to climate policy had focused elsewhere. Europe, Japan, developing countries, and even some U.S. states began their own initiatives to cut greenhouse gas (GHG) emissions. Despite the absence of the United States, the European Union pressed to save the Kyoto Protocol from irrelevance and, following the lead of the United Kingdom and Denmark, drafted its own legally binding program to reduce greenhouse gas emissions.

Against this backdrop, the Senate voted 55-43 against the McCain-Lieberman Climate Stewardship Act of 2003. This bill proposed a binding greenhouse gas emissions trading system in the United States, and for this reason it was expected to face a significant opposition-perhaps 65 votes against. While the bill was defeated, the surprisingly large number of "yes" votes was met with excitement from environmental groups. The last direct test of Congressional opinion on climate change policy was in 1997, and that resolution addressed international negotiations, not domestic policy. Indeed, the recent vote showed that, far from being a marginal and unlikely proposition, greenhouse gas regulation is a reasonable prospect even in the United States. For what it is worth, McCain and Lieberman have vowed to re-introduce their legislation until it passes. However, the bill covers domestic policy only, so if it does indeed pass, it will not be a ratification of the Kyoto Protocol.

Taken with independent initiatives in other countries, this vote could add weight to the argument that the Kyoto Protocol is becoming increasingly irrelevant. However, to interpret irrelevance as a license for "business as usual" would be wrong. On the contrary, Kyoto's relative unimportance stems from its demonstrable success in sending a signal to investors, firms, and countries that GHG regulation-specifically, regulation according to an interlinked system of tradable GHG emissions permits-will be a market reality for the foreseeable future. In other words, Kyoto is irrelevant not because the problem has gone away; rather, the regulation of GHG emissions by large groups of countries has created a functional market for GHG reductions and has consequently achieved Kyoto's primary goal: initiating the laborious process of pulling the global economy away from carbon-intensive energy sources. This emerging market for "carbon equivalent" emissions allowances therefore implies a future of altered approaches to climate governance.

Nathan E. Hultman is Assistant Professor of Science, Technology, and International Affairs at Georgetown University's Edmund A. Walsh School of Foreign Service. He was previously a NASA Earth Systems Science fellow and a Fulbright fellow.