Step on the gas to the Protocol

Far from being the economic calamity predicted by the US, the environmental targets proposed at Kyoto could spawn a lucrative new generation of industry.

Fatally flawed: that was President George W Bush’s verdict on the Kyoto Protocol. ‘For America, complying with those mandates would have a negative economic impact,’ he said, leaping to the defence of the US’s right to produce a quarter of the world’s emissions of greenhouse gases.

But Bush may have bet the wrong way on this one. Despite conventional wisdom and widespread fears among industrialists, recent studies suggest that implementing Kyoto may not have the devastating effect on competitiveness that Bush suggests. In fact, by sticking to their obligations under the treaty, Europe and Japan could find they boost economic performance, stimulate innovation and get a head start over the US on emission-reducing technologies.

Not surprisingly, it is the environmental campaigners who are pushing this line hardest. Dutch consultant Ecofys (commissioned by the WWF), for example, claims Kyoto will have relatively benign effects on the economies of Europe and Japan.’By ratifying the protocol Europe and Japan will be on to an economic winner,’ says Ute Collier, head of WWF-UK’s climate change programme. ‘It will give new opportunities in new markets. They can become world leaders in energy-efficient and clean, renewable-energy technologies.’

Under Kyoto, the EU committed to an 8% reduction in emissions from 1990 levels by 2012. And according to the report, the EU could achieve 85-95% of this target without harming its economies. This is because a large part of the reduction of CO2 could be made in sectors sheltered from international competition (such as energy supply, provided the whole of EU industry acts together). Additional costs could be passed on to customers, the report says, bandying around a number of scenarios of Japanese GDP edging ahead, the US national income falling and costs of implementation limited to a hundredth of one percentage point of GDP in Europe.

The problem with all this, though, is the burden this places on some sectors of heavy industry that are already on the backfoot in the face of global oversupply and falling margins. Those most exposed to competition are also the most energy intensive: iron and steel, non-ferrous metals, building materials, chemicals and paper and pulp. Their average production costs would increase by up to 5%, with steel and chemicals, already vulnerable, facing the highest costs of cutting emissions.

This is where policymaking gets tricky. If the approach to applying Kyoto to these industries is too heavy handed in Europe, tens of thousands more jobs will disappear and production will shift elsewhere. ‘There would be no point in a restructuring that simply shifted iron and steel production to the developing world,’ admits Ute Collier.

The technical innovation required to reduce energy consumption in heavy industry and, for that matter, to shift power generation to an infrastructure that creates less Co2 (which unavoidably reopens the debate on nuclear power) is a long-term game – unlikely to be resolved by the 2012 Kyoto target date.

Meanwhile, the UK has already made unilateral plans for the main Kyoto policies: the much-reviled Climate Change Levy and, from next April, emission trading. Taking this moral high ground means it is in the UK’s interests that other countries get as tough on CO2 as it has.

But there’s another dimension to competitiveness. Reducing emissions also means cutting out waste in production. If the UK does this ahead of other countries, it will also gain an advantage in the design and implementation of new technologies, and these can be exported. ‘There could be opportunities to take a lead in low-carbon technologies,’ says Nick Sturgeon of the Chemical Industries Association.

But it is not just the environmentalists who are talking up Kyoto. A report by engineers at the German Fraunhofer Institute for Systems and Innovation Research shows carbon dioxide emissions in Germany could be reduced by 23m tonnes annually, with major spin-off savings in energy consumption. Compressed air production alone is responsible for 10% (over 80bn kW) of industrial electricity consumption annually, and many systems are so inefficient that savings of up to 50% are possible.

‘It cannot be ruled out that the Europeans will be able to greatly increase their foreign trade by selling eco-efficient technologies to the US,’ says Dr Harold Bradke, head of energy technology at Fraunhofer. ‘If the US does not ratify Kyoto and the EU and Japan do, they will gain a competitive advantage.’

If their predictions are right, the US may have missed a trick. In fact, US under-secretary of state for global affairs Paula Dobriansky came close to admitting as much, albeit unwittingly, when she commented on the US decision to ditch Kyoto: ‘The treaty is not workable for the US,’ she said after the Bonn summit. ‘But the US has not sought to prevent others from moving ahead.’