Policy Implications from the Montreal Protocol

Policy Implications from the Montreal Protocol
Executive Summary
In the mid 1980s, the international community decided to address the issue of
ozone depletion. In 1987, the Montreal Protocol was signed, setting out abatement
schedules for major ozone depleting substances. Due to several unique factors
surrounding the issue of ozone depletion, the Montreal Protocol was, and continues to be,
a great success. That being said, there are a number of problems that parties to the
agreement have faced over the years, and it is important to learn from these and apply the
lessons to future international environmental agreements. For one, trade leakage was a
major problem for developed nations under the Montreal Protocol. Moreover, other
issues, including illegal trade, technology transfer problems, data collection problems,
and conflicts with subsequent environmental agreements have marred the Montreal
Protocol, and need to be considered when crafting new abatement policies, such as the
Kyoto Protocol.Montreal Protocol
Up until the late 1920s, the most common artificial refrigerants were toxic and
volatile gases such as ammonia and methyl chloride. It is for this reason that when
chemist Thomas Midgley Jr. developed what appeared to be a safe and inert substitute in
the form of the family of chemicals known as chlorofluorocarbons in 1930, they were
soon widely adopted as coolants for both refrigeration and industrial solvents1. It wasn?t
until a few decades later, in 1974, that two scientists by the names of F. Sherwood
Rowland and Mario Molina proposed that cfc emissions would lead to the destruction of the stratospheric ozone layer2. At that time Drs. Rowland and Molina suggested that
while inert in the lower atmosphere, when cfc molecules reach the stratosphere and are
exposed to ultraviolet radiation they release chlorine atoms that will bond with the
atmospheric ozone to form chlorine monoxide.

Ten years later, in the mid 1980s, Antarctic researchers discovered a large hole in
the ozone layer. This finding seemed to be corroboration of Rowland and Molina?s
original findings2. With a depleted ozone layer, higher levels of UV radiation will reach
the earth?s surface and cause a range of problems3. These problems can include reduced
plant growth, which would have extensive implications for the agricultural sectors around
the world; higher mortality of phytoplankton, which could affect marine ecosystems and
ultimately fish stocks worldwide; and higher rates of skin cancer and melanoma among
humans. ?A United Nations Environment Programme (unep) study [showed] that a
sustained 1 percent decrease in stratospheric ozone will result in about a 2 percent
increase in the incidence of non-melanoma skin cancer, which can be fatal. With the
successful phase-out of CFCs, however, epa expects 295 million fewer cases of this
form of skin cancer over the next century.?3

A model was developed to estimate the marginal costs and benefits from the abatement
of ozone depleting activities. The model makes the assumption that the marginal benefit
of abatement rises sharply once chlorine levels exceed 1.5 ppb, ?which is the
concentration that triggered the early stages of the Antarctic ozone hole?12. Beyond that
point, it is assumed that much higher levels of ultraviolet radiation begin to reach the
earth?s surface, and thus we see much higher marginal damages. Because of the
availability of bingeing alternatives, the model assumes that marginal abatement costs
remain relatively low and relatively inelastic, increasing slightly as we move towards a
complete ban12. Concentration levels are drawn from ?scenarios considered during debates on how to strengthen the protocol?12.
In 1985, in response to this issue, the Vienna Convention for the Protection of the
Ozone Layer was agreed to. Two years later, with mounting evidence of the dangers of
CFCs and other ozone depleting substances (ODSs) such as halons, the Montreal
Protocol on Substances that Deplete the Ozone Layer was signed4. Under the Protocol,
parties were given a specific schedule for a complete phase-out of the production and
consumption of major ODSs. For developed nations, a halon ban went into force in 1994 and CFCs were to be phased out by 1996. For developing nations, a deadline of 2010 was set for the phase-out these two groups of chemicals4. This grace period was a recognition of these countries? weaker economies, as well as the fact that the majority of ods emissions have traditionally come from the developed nations. Additionally, this staggered abatement schedule most likely increased the number of nations willing to adopt the Protocol.

This agreement is generally considered to be one of, if not the most successful
international agreements on environmental policy ever. There has been a clear downward
trend in the atmospheric levels of ozone-depleting chlorine and bromine compounds
since the bans in developed nations took effect in the mid 1990s. Between 1986 and
1993, global production of the ODSs covered under the Protocol had dropped 60
percent6. Five years later, in 1998, global production and usage levels of the substances
covered under the protocol had dropped approximately 85 percent as compared to perprotocol levels5. In September of 2006, United Nations Secretary General Kofi Annan
said of the agreement:

?The Montreal Protocol on Substances that Deplete the Ozone
Layer is effective and working. Since the
entry into force of this multilateral
environmental agreement, there has been
tremendous progress in global efforts to repair
the ozone layer. As a consequence, there are
now early signs that we are on the road to
recovery of this precious life-support
system.?13

The Protocol?s success can be attributed to a number of factors4. For one, a
relatively limited number of industries were affected by the changes mandated in the
protocol. This somewhat limited the number of firms who had any real interest in
opposing the agreement. It also meant that abatement costs were relatively low. Another
factor in the Protocol?s successful adoption was the relative conclusiveness of scientific
research on the topic. Data from a plethora of sources continued to point to man-made
ods emissions causing direct damage to the ozone layer2. Most importantly, however,
when considering why the Montreal Protocol has been such a success is the fact that
viable substitutes had already been developed. In particular, hydrochlorofluorocarbons, or HCFCs, were adopted as an interim replacement for CFCs8; HCFCs are also covered
under the Montreal Protocol, but the time horizon for their phase-out is quite a bit longer because of their much lower ozone depleting properties. In addition, at the time that the Protocol was signed, it was understood that hydrofuorocarbons (HFCs), which have no known effect on the ozone layer, would soon be commercially viable as a cfc
substitute5. Industry estimated that the cost of abatement for CFCs was somewhere in the
area of 4 billion dollars; this is compared to estimated human-health damages of nearly
1.3 trillion dollars that would be incurred from higher rates of skin cancer without any
abatement activities, let alone the other costs from higher UV radiation levels.

Trade Leakage

In spite of its success, the Montreal Protocol has been criticized for the high levels
of trade leakage that it caused. Leakage in this case refers to abatement activities in
developed countries being offset by increased emissions in developing nations. As of July
8 2003, 130 of the protocol?s 183 parties were developing nations4, all of whom have had
much longer time horizon with which to reduce their emission levels. This lag in
abatement schedules, while invaluable as a tool to attract widespread adoption, led to a
great deal of the worldwide cfc production moving away from developed nations. ?In
developing countries?CFC production [surged], though from a low base: it rose by 87%
between 1986 and 1993, while exports of CFCs from these countries rose 17-fold over
the same period.?6 Obviously some of that increase can be attributed to higher demand
stemming from economic growth, but even factoring that in, the evidence of trade
leakage is clear. Since 1996, the year that the cfc bans went into effect for developed
nations, China has been the world?s largest producer and consumer of ODSs4.
Another form of leakage that has arisen and is offsetting abatement activities
under the Protocol is the creation of a black market for CFCs and other ozone depleting
substances. As CFCs became increasingly expensive in developed nations as stockpiles
were depleted, illegal trade became more and more prevalent:

?In the US, it has been estimated that approximately
10,000 tonnes of CFCs [were] smuggled in 1995 and 1996.
In Miami, where the illegal trade was centred, illegal CFCs
were second in street value only to crack cocaine. The
environmental costs are even greater as the incentive to
swap to ozone benign alternative technologies is
undermined, supplies for legitimate developing world
customers are diverted and CFCs continue to be released
into the atmosphere.?9

These issues have continued to persist in recent years with the United Nations
Environmental Program launching ?Project Sky Hole Patching? in 200610, a project
designed to monitor the movement of suspicious shipments of ozone depleting chemicals.

The true scope of this illegal trade is unknown, however unep believes that it remains a
very serious problem. ?Citing Thailand, unep said that during 2005 88,291 kg of ozone
depleting substances were seized compared with 81,294 kg during 2004.?10
Other Lessons Learned Because of the Montreal Protocol?s success, it has been, and will continue to be held up as a prime example of what international environmental agreements should look like. As previously discussed in this paper, there were several unique factors surrounding the issue of ozone depletion that contributed to the Protocol?s success. These factors are not likely to be replicated with most future environmental issues that arise, and so any lessons drawn from the Montreal Protocol need to take this into account. That being said, any policy makers who are attempting to craft future multilateral environmental policies should take a long look at the challenges that have arisen from the implementation of the Montreal Protocol so as to avoid similar mistakes with future international agreements.

One of the biggest incentives used to obtain the participation of developing
nations was the promise of technology transfers from developed to developing economies
(known under the agreement as Article 5 nations). Article 10a of the Protocol states that:
?Each Party shall take every practicable step, consistent
with the programmes supported by the financial
mechanism, to ensure:

1. that the best available, environmentally safe
substitutes and related technologies are expeditiously
transferred to Parties operating under paragraph 1 of Article 5; and
2. that the transfers referred to in subparagraph (a)
occur under fair and most favourable conditions.11?

In spite of this provision, firms in developed nations were often reluctant to hand over
their technologies to developing nations, particularly in cases of countries such as China, who have questionable records in terms of intellectual property rights protection4. With the manufacturing of cfc substitutes, for example, firms in developed nations often preferred the transfer of capital rather than the transfer of technological ?know-how.? In China, this often slowed down these technologies? adoption because firms in developed nations were usually not able to meet the comparatively large capital needs of their Chinese counterparts right away4. Additionally, ?the excessive requirements imposed by ods-reduction technology suppliers in industrialized countries, such as establishing a joint-venture or receipt of some of the profits from using the new technology, was another problem faced by China.?4 These technology transfer problems led to a slower rates of abatement in the Article 5 nations, and ultimately increased the levels of trade leakage seen under the Montreal Protocol.

Another important lesson that can be learned from the Montreal Protocol is the
conflict that has arisen with the more recent international environmental agreement, the
Kyoto Protocol. The Kyoto Protocol aims to mitigate climate change by encouraging the
reduction of greenhouse gases. This poses a problem because many of the substances that
have been introduced as ozone-friendly alternatives to ODSs contribute to the greenhouse
effect. As previously mentioned, HCFCs are being used as an interim replacement for the
much more ozone depleting CFCs. In the case of cfc-12, a compound known as hcfc-
22 is being used as a substitute. This chemical has a global warming potential 1,700 times
higher than carbon dioxide, and hfc-23, a by-product of hcfc-22?s manufacturing, has
a warming potential 11,700 times higher than CO2

8. While hcfc-22 was left out of the Kyoto Protocol in deference to the Montreal Protocol?s long-term phase-out objectives, hfc-23 is covered under Kyoto, and this has created a contradiction that pits the two agreements directly at odds8.

Additionally, there is an even more serious issue surrounding hfc-23 and the two
agreements: a loophole that actually encourages countries to increase their production of
ozone depleting hcfc-22. Under Kyoto?s Clean Development Mechanism, countries
receive Certified Emission Reduction credits that they can then sell to other countries to
help them meet their reduction targets. This ?means that there is a perverse incentive in
place that encourages developing countries to build new hcfc-22 plants, with the
accompanying hfc-23 destruction units, and earn cer credits to boost the profitability
of refrigerant plants?CER [credits] are?priced in the region of Eur6.80/mt ($8.70),
while?the actual cost of destroying the hfc-23 is around $0.20 per ton.?8 This loophole
has essentially created a different type of leakage, not from one country to another, but
instead from one type of environmental harm to another. Any future environmental
policies should consider what impacts their abatement activities might have on other
aspects of the environment. In addition, as new environmental agreements are written,
close attention needs to be paid to how these new provisions will interact with policies
already in place.

One other major challenge that parties to the Montreal Protocol have faced in the
years since it has come into force is the difficulty of data collection and reporting,
specifically with regards to the trade of ozone depleting substances5. Under the Protocol,
a nation?s level of ods consumption is defined as production plus imports net of exports.
The tracking of the import and export of these substances is at the best of times a fairly
complicated and convoluted process. First of all, only ?bulk substances? are tracked
under the system, so final products such as refrigerators and fire extinguishers are not
covered. These bulk shipments are tracked using the World Customs Organization?s
Harmonized Commodity Description and Coding System. Under this system, goods are
classified using six digit codes, and are sometimes sub-categorized with nation-specific
codes. Additionally, goods are classified based on function, so the same substance can
have a different classification depending on its intended purpose. Complicating things
even further, relevant substances are sometimes grouped under the same classification
code as other substances (be they ODSs or non-ODSs)5. This means that a single ods
covered under the Protocol, as well as mixtures that contain it, can have many different
classification codes and be very difficult to actually track. Any future agreements need to ensure that their objectives are laid out in such a way that data collection and reporting can be done with relative confidence and cost-effectiveness.

Kyoto Protocol
The application of the above lessons is most relevant today in the context of the
already mentioned Kyoto Protocol. The Kyoto Protocol, originally negotiated in
December of 1997 under the United Nations Framework Convention on Climate
Change14, aims to curb climate change by reducing emissions of greenhouse gasses
(GHGs). The agreement calls for its parties, known as Annex B countries, to reduce their
greenhouse gas emissions to levels 5.2 percent below 1990 levels over a period spanning
the years 2008 ? 2012. The abatement model laid out under Kyoto is heavily based on the
Montreal Protocol: ?In fact, there is hardly any aspect of the fccc and its Kyoto
Protocol which the Montreal Protocol has not influenced, about which it has not inspired
discussions on adequate design or for which it has not been cited as a precedent.?5 While
it is imperative that the international community learn from the challenges faced by past
agreements such as the Montreal Protocol, recognition of the unique circumstances
surrounding ozone depletion needs to be factored in. Blind emulation of previously
successful actions is not a wise strategy.

The reality is that the issues of climate change and ozone depletion are very
different in nature. The largest contributing substance to the greenhouse effect is carbon
dioxide, which is released every time a fossil fuel is burned, and for that matter every
time someone exhales. Unlike the major ozone depleting substances, it is impossible to
completely ban greenhouse gasses, and that makes them much more difficult to regulate, monitor, and ultimately abate. Also, compared to the Montreal Protocol, ghg abatement
affects a much larger number of firms, including the majority of the energy and
transportation sectors, among others. This likely has increased the number and tenacity of
Kyoto?s opponents, making consensus much more difficult to achieve. Most importantly,
perhaps, is that unlike with ozone depleting coolants, there is no cheap and effective
substitute for fossil fuels that is ready to commercialize and can be introduced in a matter of a few years. This means that meaningful reductions in ghg emission levels will more than likely require changes in behaviour for emitters, large or small.

Clearly these two issues are very different in many ways, but that is not to say that
none of the lessons learned from the experiences of the Montreal Protocol can be applied
to Kyoto. Issues of technology sharing, for example may very well arise, except that this
time, instead of cfc substitute manufacturing, it will be new carbon abatement
technologies such as ?clean coal? that will be transferred to firms in developing nations.
Close attention should be paid to the technology transfer problems that occurred under
the Montreal Protocol, so as not to repeat the negative effects. Also, the issue of potential conflicts with future agreements should be considered. In the same way that ods
abatement has contributed to greenhouse gas emissions, if actions taken under Kyoto are
not well thought out, they may very well end up being in conflict with future
environmental agreements.

Moreover, just like with the Montreal Protocol, trade leakage is expected to be a
major challenge with Kyoto. In this case, leakage is defined as the offsetting of abatement in Annex-B nations by an increase in ghg emissions from non-Annex B nations. Unlike with Montreal, not all the largest emitters are parties to the Kyoto Protocol, so leakage will not necessarily be from developed to developing nations, but rather from
participating nations to non-participating nations. There is no real consensus on what
kind of levels can be expected, with estimates varying wildly:

?As reported by the Energy Modeling Forum (emf,
(2000)), the current models have the following magnitudes
for the leakage rate: 8% (G-Cubed), 9% (gtem), 11%
(Gemini-E3), 14% (WorldScan), 26% (MS-mrt), 34%
(mergfa). Also, oecd (Burniaux and Oliveira-Martins
(2000)) has reported that their leakage estimate with the
green model is 5%. These estimates are reported for the
scenario where CO2 emission permits are non-tradable
between countries. According to the existing models,
permit trading decreases the carbon leakage rate
approximately by half.?15

Many factors could play into carbon leakage levels, including the availability of
alternative energy sources, the nature of carbon markets around the world, and
fluctuations in the price of oil. This makes carbon leakage a very complex issue to deal
with, and policy makers in participating nations would be wise to look at what caused the
high levels of leakage with ODSs.

Conclusion
The success and simplicity of ods abatement are unlikely to be replicated with
future international environmental agreements, but by examining both the triumphs and
the failures seen under the Montreal Protocol, we can strengthen new environmental
policies as they arise. The debate surrounding Kyoto, and whatever agreement on climate
change takes its place beyond 2012, is sure to continue for the foreseeable future. This
issue is much more complicated and much more open-ended than ozone depletion, and
will require a great deal of deliberation. By understanding the similarities and differences between climate change and ozone depletion, we can hopefully craft smarter, more effective policies in the future, and ultimately add the greenhouse effect to the list of environmental issues that have been successfully addressed by the international
community.

Policy Implications from the Montreal Protocol 7.3 of 10 on the basis of 3272 Review.