Kyoto + 10: Carbon Credits and the Countdown to Compliance

Linda Suzuki

August 1, 2007

There is no end in sight to the debate over global climate change: Is climate change a bad thing? If so, how bad is it? What causes it? Should we do something about it? What is the best course of action to take?

For businesses, the challenge is to quantify the benefits of reducing energy usage in terms that stakeholders can support—profit versus loss.

For the environment, the challenge is to quantify the risks of increasing energy usage in terms that motivate both the developed countries, with their high greenhouse gas (GHG) emissions and standards of living, and the developing countries, which are industrializing to raise their standards of living.

Regardless of where one stands on the issue of climate change, energy efficiency is something everyone can get behind because it is good for the environment and for business. The insulation industry has been saying this for years.

The Kyoto Protocol

In 1997, at a meeting in Kyoto, Japan, members of the United Nations voted to amend the United Nations Framework Convention on Climate Change, an international environmental treaty. The amendment, which became known as the Kyoto Protocol, mandates the reduction of GHG emissions by participants and establishes severe compliance penalties for countries that fail to meet their reduction goals.

What makes the Kyoto Protocol unique is the “carrot and stick” approach it takes to enforcement. Essentially, the Kyoto Protocol created a new, global financial market using carbon credits that countries can earn by reducing emissions. These credits then can be traded like any other commodity on an international exchange.

To date, 170 countries have entered into the Kyoto Protocol. Those countries are responsible for 61 percent of the world’s GHG emissions. Twenty-four countries—including the United States—refused to enter into the Kyoto Protocol. Together, the 24 non-participating countries are responsible for 39 percent of the world’s GHG emissions; the United States alone is responsible for 25 percent.

Increase Efficiency, Decrease Emissions

Because of the way treaty compliance is measured, the Kyoto Protocol is often thought of only in terms of decrease in emissions. In fact, what the amendment calls for is an increase in energy efficiency.

There is an old saying in the plumbing industry: When a pipe bursts, you don’t fix it by mopping the floor. By the same token, if you are manufacturing under the Kyoto Protocol, you do not reduce GHG emissions at your plant by making improvements to the tops of the smokestacks. Instead, you reduce pollution by examining the first step in your manufacturing process (and every step that follows), performing inspections and maintenance, eliminating waste, giving new technologies a try (even if the older technology works “just fine”), and then going back to step one and doing it all over again.

For years, advocates of “lean manufacturing” have touted the benefits of committing to continuous improvement. But it was not until the Kyoto Protocol put a price tag on emissions that many manufacturers began managing energy efficiency the way one manages labor, materials, and other budget line items.

Think Globally, Act Locally

Since Kyoto, the concept of carbon credits has taken hold in ways few would have imagined. Although the United States government did not sign on to the Kyoto Protocol, many people in the United States have joined the carbon credit revolution.

State governments have taken steps toward addressing their most critical environmental concerns by implementing Kyoto-inspired “cap-and-trade” systems. The state sets a cap on a certain pollutant and then gives businesses whose processes create that pollutant a chance to reduce emissions, get under the cap, and earn credits. Businesses that exceed the cap can purchase these credits to avoid pollution penalties.

Under a cap-and-trade program, a business that invests in energy efficiency can see a relatively short-term cash return on that investment through the sale of credits, in addition to long-term savings on energy. This encourages businesses to try new “green” technologies and methodologies that stockholders might not have supported on the basis of long-term efficiency alone. On the other hand, a business that does not invest its working capital in energy efficiency can take that cash to market instead, and negotiate for the purchase of credits as it would negotiate for the purchase of any other material used in the manufacturing process. The flexibility of cap-and-trade systems makes them appealing to both demand- and supply-side economists.

The Kyoto Protocol has inspired energy efficiency programs at the local level, too. In the United States, 532 city mayors—representing more than 66 million Americans—have signed the U.S. Mayors Climate Protection Agreement (USMCPA), pledging to:

  • strive to meet or beat the Kyoto Protocol targets in their own communities, through actions ranging from anti-sprawl land use policies to urban forest restoration projects and public information campaigns;
  • urge their state governments and the federal government to enact policies and programs to meet or beat the GHG emission reduction target suggested for the United States in the Kyoto Protocol (by 2012, reduce emission levels to 7 percent less than they were in 1990); and
  • urge the U.S. Congress to pass bipartisan GHG reduction legislation, which would establish a national emission trading system.

USMCPA-participating cities are not told how to reduce GHG emissions. However, many of these cities have seen the value of cap-and-trade at the international, national, regional, and state levels, and have applied the concept on a smaller scale.

The most significant aspect of these grass-roots energy efficiency efforts in the United States is that they are often not led by governments or even by environmental activists, but by businesses looking at the bottom line. This should come as no surprise to anyone who saw the most recent Manufacturing Energy Consumption Survey by the U.S. Energy Information Administration (EIA), which shows American businesses spending more than $94 billion each year on energy. Looking for ways to meet stockholders’ profit expectations, managers may hope for a drop in energy costs, but few would be willing to gamble their jobs on it. Instead, forward-thinking managers are looking at ways to use energy more efficiently to reduce expenditures and leave more dollars in the profit column. By participating in cap-and-trade programs, manufacturers can share some of the costs for improving energy efficiency at their facilities.

An Opportunity for Insulation

The popularity of cap-and-trade programs continues to grow, both in the number of participants and in the creativity of the programs being implemented. These programs are being adapted to meet the needs of diverse communities and industries. The insulation industry also has an opportunity to grow in this new environment on many levels.

  • At the state level: Many state governments have a cap-and-trade program of some kind, and nearly all of the remaining states are considering one. The business climate in each state (rural versus urban, agricultural versus manufacturing, importing versus exporting, etc.) can help predict the type of cap-and-trade program that will work best there. Making sure elected representatives see business as a resource when they evaluate energy efficiency legislation is a good way to advocate insulation’s role in a cap-and-trade solution.
  • At the local level: In reaching their MCPA goals, many municipalities now require that new government buildings meet the certification standards of the U.S. Green Building Council ( For some cities, this mandate includes schools, hospitals, firehouses, and civic arenas—not just office buildings. Green construction has grown into a multibillion-dollar industry in which insulation plays a key role. Industry insiders can find out who is sitting on their mayor’s MCPA advisory committee and make sure the insulation industry is represented. Insulation experts are a valuable resource for those committed to energy-efficient construction.
  • At the business level: By keeping up to date on all regional, state, county, and city energy efficiency initiatives, insulation end users can answer questions about the role of insulation in these programs. It is beneficial to help both clients and employers participate in cap-and-trade programs, even if participation is voluntary. It is not just a cost-savings opportunity; being a good corporate citizen provides a “halo effect” for businesses within the communities.
  • At a personal level: Another unexpected result from the Kyoto Protocol is the degree to which people have adopted the concept of cap-and-trade in their lives. Several websites help calculate “carbon footprints”—the impact of each person’s lifestyle choices (such as driving to work, living in a poorly insulated house, using non-recyclables, etc.) on the environment. These sites explain possible “offsets”—actions one can take to reduce GHG emissions, such as planting trees or using renewable energy. The goal of footprint calculators is to help people become “carbon neutral,” or to offset their individual footprints entirely. The number of ways available to mitigate the effects of GHG emissions is surprising. This could be an attention-getting tool for promoting insulation as a means of increasing energy efficiency within industry.
Kyoto + 10

The countries that entered into the Kyoto Protocol have had 10 years to get their cap-and-trade programs up and running. Beginning next year, Kyoto moves into its enforcement phase: Developed countries must have reduced their GHG emissions by an average of 5 percent below 1990 levels. For many countries, such as those in the European Union, this can mean a reduction of approximately 15 percent from what their GHG emissions were forecast to be in 2008. Developed countries can purchase carbon credits from developing countries, which have no GHG emission-reduction goals but instead earn credits for “clean development” projects that are implemented under the Kyoto Protocol. If a developed country fails to reach its GHG emission-reduction goal, it must make up the difference and then reduce emissions another 30 percent as a penalty.

Not everyone is a fan of carbon credits or cap-and-trade programs. Some business leaders say these programs add a whole new layer of compliance reporting to industries that already feel overburdened by regulation. Some environmental activists believe that framing the climate-change debate in terms of dollars and cents—instead of right and wrong—detracts from environmental responsibility. Some public policy experts, skeptical of global warming, warn that Kyoto is a “global socialism initiative” to transfer wealth from free-market economies to the Third World. Some less-polluted countries argue that Kyoto does not go far enough to curb GHG emissions from major polluting countries. And some economists calculate the costs of the Kyoto Protocol as outweighing the benefits. Not surprisingly—given the complexity of the science, economics, and international relations involved—the Kyoto Protocol has neither unanimous opposition nor unanimous support.

It will be years before reliable data is available on the effects cap-and-trade programs have on reducing GHG emissions. If history is any indication, there will never be agreement on the cost benefits, regardless of how much data is collected. What is clear, though, is that Kyoto is the first international environmental treaty based on the assumption that for any energy efficiency solution to be effective, it must appeal to the business community as stewards for stakeholders as well as stewards for communities.

The insulation industry has credibility on both sides of the climate-change debate. Cap-and-trade programs offer the opportunity to leverage that credibility in ways that will be good for business and the environment.