The intersection just after Kyoto

Posted by Marc Hodak on July 23, 2008 under Unintended consequences | Comments are off for this article

I can’t say the critics are groundless,” says Jung Jaesoo, 48 years old, who runs a consulting firm that advises Korean companies on how to qualify for credits. “But the Kyoto Protocol is a multilateral agreement. It is impossible to make only South Korea an exception now.”
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As to whether it is sensible for his company to reap rewards for installing pollution-control technology in a highly industrial country like South Korea, Mr. Rosier says the rules of the U.N.’s system were set by the Kyoto negotiators.

And that’s that.

These quotes reference the legal, and oh so critical, distinction in the Kyoto Ptococol between developed nations, like those of the OECD that are expected to bring their emissions to below those of 1990, and “developing” nations for whom the 1990 targets would be even more wildly inappropriate. Without getting into the details, this legal distinction between country types creates a game-theoretic situation appreciated by all incentive experts: arbitrage across the boundary.

The boundary, in the case of Kyoto, occurs around Portugal, a “developed” nation whose economic growth plateaued around 1581, and South Korea, which was plausibly “developing” when Kyoto was negotiated in the mid-90s, but at the time was on a very different trajectory. South Korea’s GDP is now higher, and still faster-growing than Portugal’s. In fact, South Korea is now on par with most E.U. nations.

Still, because a treaty just had to be signed in 1997 so the politicians of the day could have something to show, and because one size so clearly did not fit all in the massive central planning experiment embedded in the treaty, a cut-off had to be made somewhere. All of the politicians back then knew that none of them would be in office to deal with any consequences of their mess.

Since then, businesspersons have studied the rules, just the way they were supposed to, and are now playing them the way they were written, just as they were expected to, though not necessarily with the intended outcomes. These companies were meant to come up with clever and powerful ways to reduce emissions, and they are, in fact, doing that. They just weren’t supposed to benefit so unevenly or unfairly from the treaty. You know that politicians were almost as obsessed about fairness when these discussions were going on as they were with simply getting something signed.

Alas, because the Kyoto Protocol was created by politicians instead of incentive experts, we are now starting to see stories about how completely this thing is going to be gamed. Sure, the experts were invited to Kyoto for some sake and visits to various shrines, but in the end, everyone was compelled to worship at the UNFC Temple of Climate Change.

OK, you want an unnecessary operation, go ahead. But as I always tell my relatives, sure, operations are expensive, but you still shouldn’t be performing them on each other. Hire a surgeon, for God’s sake.