There are numerous economic instruments promoting climate protection. Their application would boost environmental protection and social engineering as well as reduce market distortions regarding the price of natural resources. Out of these economic instruments the so-called Kyoto Flexible Mechanisms (emission trading, joint implementation, clean development mechanism) seem to attract the most attention. Their principle is that climate protection measures, emission reduction and abatement are to be done where we can expect the most accomplishments and at the same time the least cost possible.

The EU, being a wealthy society, emits greenhouse gases into the atmosphere in disproportionate volume regarding the number of its inhabitants. Realising its unsustainable characteristics the EU intends to launch an emission trading scheme in order to accomplish its 8% CO2 reduction target by 2012, regardless of when the Kyoto Protocol enters into force (depends now on the Russian ratification). The directive proposal of emission trading will be finalised by the end of the year, the first trading period starts in 2005. It seems that emission trading will have a significant career outside of the EU as well, though the available experiences of its effectiveness are rather limited.

Emission trading has been criticised by environmental NGOs over its environmental effectiveness. The criticism on one hand stems from the many rebates and privileges in the proposed EU directive and on the other hand from the likely watering down of the EU emission trading scheme by linking it to joint implementation and clean development mechanism. Multinationals and some countries that are not on track to achieve their commitments lobby for the later. This way the commitments of industrialised countries can be achieved through investments in transition and developing countries, hence without any domestic emission reduction measure taking place. Its first signs can already be detected in EU countries. In practice this means that developed countries can continue with their unsustainable energy patterns and can even transpose them by technology transfer to less developed countries. This not only hinders climate protection in the long run but exacerbates dependency between those groups of countries. Developed countries may purchase allowances and credits at a cheap price without having to make domestic structural changes or technological improvements. It is a commonplace now that we need a shift of paradigm in our consumption and production patterns in order to achieve sustainability. This is why environmentalists support that up to the end of the first five year period (2012) EU countries need to meet their commitments by domestic measures.

EU member countries have a considerable room for manoeuvre at establishing the national scheme for greenhouse gas emission allowance trading. An important issue is the national allocation of emission permits. Environmental NGOs advocate allocation through auctions, however the EU directive proposal rather limits its role. In the eyes of many, climate protection is no more than curbing CO2 emissions disregarding other greenhouse gases or the atmosphere as a complex system. For real climate protection, however, measures need to be designed to cover the whole economy and strict emission caps must be set.

As far as Hungary is concerned, in our opinion three particular issues of the Kyoto Mechanisms need to be clear. The first is to set the 1985-87 baseline, the present and the likely future (of 2008-12) national emission. The second is to agree on national targets of 2012 and 2040. Frontrunner countries are already discussing the options of a 60-80% reduction by mid century, a cut suggested by most climate scientists. To catch up with them Hungary needs to prepare now a complete socioeconomic strategy and timetable. Thirdly, it is desirable to reach consensus on the fact that the global atmosphere is never a tradable good or private property such as 1 kilogram of banana or a computer. Thus the agreements need to be clear, transparent and available to the general public.

In Hungary the Kyoto Mechanisms’ Joint Implementation is in an advanced state. Several JI projects have been carried out while other are awaiting approval. Some important legislative elements, however, are still missing or have not entered into force yet. Based on the experiences of the recently approved three Hungarian JI projects the regulation needs to be improved. The questions of credit share between the investor and Hungary, how many years the credits are ‘given’ for, whose property is the abated emission, which are the desirable project types, which technological investments are preferable must be answered. Also the use of the resulting revenue must be decided (sectoral, R&D or regional goals).

In theory JI has many advantages (reduces the global costs of emission abatement), however without appropriate national regulations and long term climate protection strategies it may limit the recipient country’s room for manoeuvre and may increase the costs of future climate protection measures.

The preparation of the national regulation of emission trading is also long overdue. A well designed, throughout structural change may pave the way for increased emission reduction capacity in the next decades. The regulation needs to tackle not only the energy sector and its installations but must incorporate all the long term aspects of the economy as a whole and social and environmental concerns, global climate protection as well.

Based on the latest developments in environmental fiscal reform and energy tax (a common European energy tax will enter into force), it is worth to consider the link between the two economic instruments. While emission trading concentrates on large industrial installations, energy tax covers diffuse sources of emissions (transport, households), so the two instruments can be complementary.

In our opinion some pilot projects can be given approval before all the related questions are answered and the regulation is prepared, since real problems arise in the process of implementation. We see a great opportunity in the Kyoto Protocol, however there are still too many open questions to declare that it will considerably improve the state of the environment. It is up to us if this instrument will live up to its promise and potential.

Erzsébet Beliczay
Zoltán Szabó
Clean Air Action Group, Hungary