Strong opinions divide the pro- and anti-Kyoto camps, particularly when the discussion centres on the economics of the Protocol. Let us look at this aspect of the debate in a reasoned and dispassionate manner.

First, let's make the observation that the Kyoto Protocol is not really about greenhouse gas emissions but actually about change in the way we think about the total cost of energy. Kyoto economics are about attaching as many of the associated costs as possible (hopefull all) to the use of energy, i.e., not just the traditional ‘internal’ costs of exploration, development, production and marketing, but also ‘external’ costs such as environmental degradation, pollution, resulting health effects, disposal costs, etc. Prior to the Montreal Accord, and later the Kyoto Protocol, these ‘externalities’ were discussed in academic circles but were rarely quantified or addressed in any practical way.

When all externalities are added to costs, the perception of the relative merits of one form of energy over another changes significantly.

Table 1 - Chart 1

In reality, the external costs associated with the consumption of various energy sources have been borne by all of us. The effect of the free ride given to harmful externalities has been the degradation of our environment.

Smokestacks are one of the more visible signs of external costs associated with energy use. The toxins and other harmful output were initially combated at the local level: first by building ever-higher structures to spread the emissions over a greater area; then by the installing of scrubbers to clean the output as much as possible. Since it became more difficult for affected persons to show a causal link between health problems and emissions, the emitters were able to reduce their liability, insurance, and potential litigation costs, and the problem was ‘solved.’

Science has demonstrated to the satisfaction of the majority of sceptics that non-toxic output can be the biggest risk factor. Carbon dioxide (CO2) – the inevitable consequence of combustion – is the biggest and most problematic greenhouse gas. Despite its importance, there have been no serious attempts to reduce its creation on a local level because it is a non-toxic and naturally occurring compound. However, we now know that the consequences of carbon dioxide release are profound and global in nature, and any solution must be of similar magnitude. The economic question now becomes: How do you capture the externalities of greenhouse gases that cannot be spread over a larger area or ‘scrubbed’ away? Thus, the Kyoto Protocol’s plan to create tradable emission credits was born.

The following table shows the amount of carbon (mostly in the form of carbon dioxide) emitted in 1990 and 1999.

Chart and Graphic Courtesy of Economist.com

Opponents of Kyoto state that it will "drive up energy costs." This may or may not be true. What the creation of emissions credits does is raise the cost of fuel with high external costs relative to the fuels with low, or zero, external costs associated with them. In the “Total Cost of Energy” table and chart (above), both Petroleum (Oil) and Coal have the same Total Cost of Energy (TCE) of 14 units. However, the unit costs are distributed differently. Coal has a lower source price but higher environmental costs and health costs. Oil has a slightly higher source cost but slightly lower environmental and health costs than coal. Natural Gas is the best of the fossil fuels shown in the chart at a total costs of 11 cost units. The internal costs of developing hydro (water), wind and solar (PV–photovoltaic) are higher than any of the source costs for fossil fuels. However, when environmental and health costs are added, then the “full cost” of even the most expensive renewable energy source is less than the least expensive fossil fuel.

When the total cost of fossil fuel energy is reflected in the price of the commodity, then there will be incentive for new investment in renewable energies to take place. This will create new, dynamic, and high value-added economic activity that will manifest itself in new, sustainable, well paying, 'green' jobs that will not be at the expense of the environment or our health.

'Environmental expertise' will be exported by nations and regions that develop it early in the cycle. Early-adopting nations will reap the greatest gain by exporting this expertise to those that are slow to embrace the inevitable change.

Lesser-developed nations need not fall behind in this scenario. If they did not have the technical expertise to export, they would still be able to improve their material standard of living without polluting their environment to obtain an energy source. An example of this would be a small country in western Africa that has areas that are very windy, or areas of North Africa that have a lot of sunshine. In both cases, wind and solar energy could be used locally to offset expensive oil imports and surplus electricity could be used to separate water into hydrogen and oxygen that could then be stored and shipped around the world to be used in hydrogen fuel cells to create energy and pure, clean water as a by-product. For the first time in history, nations without traditional natural resources of oil, coal or tar sands will be able to compete in the energy field through strategic implementation of technology. This can readily be seen through the benefits derived from Germany's early adoption and promotion of renewable forms of energy.

These are just a couple of the many, many new ways in which economic and energy behaviours would change. That brings us back to our first comment. The Kyoto Protocol and Montreal Accord are about change - the way we value sources of energy to better reflect their total – and not just partial – costs.

From time to time, many discussion items are put forth in 'economic clothes' that either are red herrings, or scare tactics. These are done in order to drive a wedge between common sense and common action. It is important to understand in these instances that the nature of the debate is not really about greenhouse gas emission credits, nor sulphur dioxide or nitrous oxide credits. It is about understanding the true and total cost of energy and industrial processes, and making sure that environmental and health costs are added into the cost of any energy source or process.

Understanding the Total Cost of Energy (and processes) will allow society to make informed and rational decisions on where best to invest scarce capital for both the greatest financial and societal benefits. The best policies are ones where the two go hand-in-hand. Financial returns do not need to be made at the expense of environmental and health concerns, nor do environmental and health concerns have to reduce financial returns.

Trading Greenhouse Gas credits assists in the development of a sustainable economic model. A sustainable economic model in turn provides stable, well-paying 'Green' jobs, new technologies, new industrial innovations and other positive economic activities. The return to all participating nations is sustainable long-term prosperity.

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GHGx Corporation - Greenhouse Gas Exchange
Global Emissions Trading for a Brighter Future™