Economic consequences of the US withdrawal from the Kyoto/Bonn Protocol

Abstract

The US decision not to ratify the Kyoto Protocol and the recent outcomes of the Bonn and Marrakech Conferences of the Parties have important implications for both the effectiveness and the efficiency of future climate policies. Among these implications, those related with technical change and with the functioning of the international market for carbon emissions are particularly relevant, because these variables have the largest impact on the overall abatement cost to be borne by Annex B countries in the short and in the long run. This paper analyses the consequences of the US decision to withdraw from the Kyoto/Bonn Protocol both on technological innovation and on the price of emission permits (and, as a consequence, on abatement costs). In particular, the analysis highlights mechanisms and feedbacks related to technological innovation, technological spillovers and R&D which could be relevant and which modify some policy relevant conclusions. First, we identify two feedback effects which explain why our results lead to a less significant fall in the price of permits than in most empirical analyses recently circulated. We show that the US defection from the Kyoto Protocol, by inducing a decline in the demand and price of emission permits, lowers the incentives to undertake energy-saving R&D. As a consequence, emissions increase and feed back on the demand and supply of permits, thus implying a lower decline in the price of permits than previously estimated. At the same time, as a result of the reduced R&D investments and the augmented emissions, climate change damages intensify and require an increase in investments that are again coupled with a growth of emissions. By thus again increasing the demand for permits and reducing their supply, this effect enhances the previous mechanism. Notwithstanding the lower decline in the price of permits, the paper still identifies a smaller price than would occur with a US participation. Therefore, we emphasise in a second step the crucial role of Russia in climate negotiations due to a large increase in Russia's bargaining power.     

Evaluating the Bonn–Marrakesh agreement

This article evaluates the environmental effectiveness and economic efficiency of the Kyoto Protocol after the Bonn Agreement and the Marrakesh Accords. The US withdrawal has by far the greatest impact in reducing the environmental effectiveness, lowering the price of traded emission permits and reducing Annex I abatement costs. The decisions on sinks imply that the Annex I CO₂-equivalent emissions without the US will come out at about 1/2% below base-year level, instead of over 4% below base-year level. Without US participation, the emission permit price is estimated to be low. Therefore, banking hot air by Russia and the Ukraine is of absolute importance for the development of a viable emissions trading market, and would also enhance the environmental effectiveness of the Kyoto Protocol.     

Evaluating the Bonn—Marrakesh agreement

Abstract

This article evaluates the environmental effectiveness and economic efficiency of the Kyoto Protocol after the Bonn Agreement and the Marrakesh Accords. The US withdrawal has by far the greatest impact in reducing the environmental effectiveness, lowering the price of traded emission permits and reducing Annex I abatement costs. The decisions on sinks imply that the Annex I CO₂-equivalent emissions without the US will come out at about 1/2% below base-year level, instead of over 4% below base-year level. Without US participation, the emission permit price is estimated to be low. Therefore, banking hot air by Russia and the Ukraine is of absolute importance for the development of a viable emissions trading market, and would also enhance the environmental effectiveness of the Kyoto Protocol.     

Russian behaviour in the market for permits under the Kyoto Protocol

After the US withdrawal from the Kyoto Protocol and the extension of national quotas in the Bonn and Marrakesh agreements, meagre environmental effects and a low price of emission permits are likely to be the outcome of implementation. This paper attempts to analyze this scenario, mainly in relation to the Russian case. I discuss on the basis of certain key assumptions the strategic options open to the supply side of the permit market and Russia’s potentially incompatible interests as a producer of oil and gas on the one hand and a dominating seller of emission permits under the Kyoto Protocol on the other. The analysis shows that Russian oil and gas interests are likely to boost Russia’s inclination to sell permits, ultimately resulting in lower permit prices.     

Russian behaviour in the market for permits under the Kyoto Protocol

After the US withdrawal from the Kyoto Protocol and the extension of national quotas in the Bonn and Marrakesh agreements, meagre environmental effects and a low price of emission permits are likely to be the outcome of implementation. This paper attempts to analyze this scenario, mainly in relation to the Russian case. I discuss on the basis of certain key assumptions the strategic options open to the supply side of the permit market and Russia's potentially incompatible interests as a producer of oil and gas on the one hand and a dominating seller of emission permits under the Kyoto Protocol on the other. The analysis shows that Russian oil and gas interests are likely to boost Russia's inclination to sell permits, ultimately resulting in lower permit prices.     

Estimating the CDM market under the Marrakech Accords

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM’s share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

Estimating the CDM market under the Marrakech Accords

Abstract

The agreement on implementation of the Kyoto Protocol achieved at COP7 in Marrakech has important implications for investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the protocol and significant amounts of carbon sequestered in domestic sinks can be credited. In addition, the potential supply of surplus emission permits (hot air) from Russia and other economies in transition may be as high as total demand in the first commitment period. Thus, even under restraint of hot air sellers, CDM demand will be limited, and a low demand, low price carbon market scenario appears likely.

The magnitude of the CDM will be influenced by a host of factors both on the demand and the supply-side. We analyse these using a quantitative model of the global carbon market, based on marginal abatement cost curves. Implementation and transaction costs, as well as baseline and additionality rules affect the CDM's share in the carbon market. Demand for the CDM is sensitive to changes in business-as-usual emissions growth in participating Annex B countries, and also to crediting for additional sinks. Permit supply from Russia and other economies in transition is possibly the most crucial factor in the carbon market.     

Implementing the Kyoto Protocol without Russia

Abstract

This paper examines implementation of the Kyoto Protocol without Russia. It concludes that implementation without Russia is possible, although it requires political will on the part of the countries that wish to proceed with the Protocol. It would lead to higher compliance costs for Annex B buyer regions, but other regions, except Russia, would benefit financially. Russia would forego revenue of at least $20 billion for the first commitment period. Implementation without Russia could improve the environmental performance of the Protocol. It would reduce reliance on Annex B sinks, use of surplus assigned amount units (AAUs) for compliance, and the quantity of Kyoto units banked for subsequent commitment periods. Actual emissions by Kyoto Protocol Parties would fall, but the reduction may be offset by leakage to the US and Russia.     

Russia: climate policy formation and implementation during the 1990s

Russian climate policy initially developed slowly, mostly in response to the emerging international regime in the early 1990s. Developments accelerated by the end of the decade, under the influence of the UNFCCC, and especially, its Kyoto Protocol. Developments included creation of institutional framework for domestic implementation of its reporting and other UNFCCC commitments, formulation of mitigation and adaptation strategies and measures, GHG inventory compilation and reporting, crystallizing its major national positions towards international mechanisms, initiation of vertical subsidiarity of government authority in climate policy implementation, and channeling interactions between the government and business community. The Kyoto Protocol and its international mechanisms (particularly IET and JI), mark a turning point, with opportunities for Russia to benefit if the Kyoto Protocol enters into force; the apparent US withdrawal from Kyoto puts Russia in a central position. Besides external influences, national climate policy has been strongly influenced by the domestic reforms towards market economy and democracy: combining new opportunities with constraints characteristic of the transition period. The gap between climate policy goals and putting them in practice has been considerable, but is narrowing.     

Carbon capture and storage: combining economic analysis with expert elicitations to inform climate policy

The relationship between R&D investments and technical change is inherently uncertain. In this paper we combine economics and decision analysis to incorporate the uncertainty of technical change into climate change policy analysis. We present the results of an expert elicitation on the prospects for technical change in carbon capture and storage. We find a significant amount of disagreement between experts, even over the most mature technology; and this disagreement is most pronounced in regards to cost estimates. We then use the results of the expert elicitations as inputs to the MiniCAM integrated assessment model, to derive probabilistic information about the impacts of R&D investments on the costs of emissions abatement. We conclude that we need to gather more information about the technical and societal potential for Carbon Storage; cost differences among the different capture technologies play a relatively smaller role.     

Economics of the Kyoto Protocol for Russia

Abstract

In this article we propose a careful analysis of the economic consequences of the Kyoto Protocol for Russia, taking into account the most recently available data and the latest developments in the trends regarding Russian economic recovery. We present a review of different GHG forecasts for Russia and develop a new forecast for uncertain GDP growth and changing elasticity of GHG emission per GDP. Since the rate of growth remains uncertain, elasticity could change over time, as well as the fuel mix. We apply the Monte-Carlo method to simulate these uncertainties and to produce a reasonable interval for CO₂ emissions in 2010. The probability of Russia exceeding its Kyoto emissions budget is essentially zero. Further, we discuss the benefits for Russia from the Kyoto Protocol, and more generally from implementation of GHG mitigation policy. Ancillary benefits from Kyoto Protocol implementation will bring essential reductions in risk to human health. On the other hand, potential negative changes in the fuel mix and GDP structure, as well as a slowing of the innovation process, could exacerbate existing health problems. Alternatives to the Kyoto Protocol may bring much tougher commitments to Russia. We conclude that the Kyoto Protocol is the best possible deal for Russia. Therefore, Russia most will ratify it.     

Credited forest carbon sinks: how the cost reduction is allocated among countries and sectors

Forest carbon sinks have been included in the Kyoto Protocol as one of the mechanisms for mitigating climate change. Consequently, credited sinks decrease the need to reduce emissions. We analyse in detail both the economywide and the sectoral effects of inclusion of carbon sinks as agreed upon in Bonn and Marrakesh for the first commitment period of 2008–2012. The focus of our analysis is the special treatment for Canada and Japan that allows them larger sinks. The analysis is performed with the multi-region computable general equilibrium (CGE) model GTAP-E.New Zealand benefits most from the inclusion of sinks as it gains large carbon sinks from afforestation. Also in Sweden, Canada and Japan the costs of achieving the emission target are considerably reduced. Of these countries, only Canada has high costs without sinks. Thus credited sinks partly reduce the difference in economic burden of achieving the Kyoto target among countries. Even though larger sinks clearly benefit Canada and Japan, their effect on other countries, either on the economywide or on the sectoral level, remains marginal. Allowing larger sinks is, indeed, of relatively minor importance for the world economy and emission reduction, compared to the US withdrawal from the Kyoto Protocol.     

Credited forest carbon sinks: how the cost reduction is allocated among countries and sectors

Forest carbon sinks have been included in the Kyoto Protocol as one of the mechanisms for mitigating climate change. Consequently, credited sinks decrease the need to reduce emissions.We analyse in detail both the economywide and the sectoral effects of inclusion of carbon sinks as agreed upon in Bonn and Marrakesh for the first commitment period of 2008–2012. The focus of our analysis is the special treatment for Canada and Japan that allows them larger sinks. The analysis is performed with the multi-region computable general equilibrium (CGE) model GTAP-E.

New Zealand benefits most from the inclusion of sinks as it gains large carbon sinks from afforestation. Also in Sweden, Canada and Japan the costs of achieving the emission target are considerably reduced. Of these countries, only Canada has high costs without sinks. Thus credited sinks partly reduce the difference in economic burden of achieving the Kyoto target among countries. Even though larger sinks clearly benefit Canada and Japan, their effect on other countries, either on the economywide or on the sectoral level, remains marginal. Allowing larger sinks is, indeed, of relatively minor importance for the world economy and emission reduction, compared to the US withdrawal from the Kyoto Protocol.     

A credible compliance enforcement system for the climate regime

The compliance enforcement system of the Kyoto Protocol provides only weak incentives for Parties to comply with their commitments. For example, the penalties for non-compliant countries are not legally binding, and moreover, there is no second-order punishment for those countries that fail to implement them. Thus, a Party can simply refuse to comply without consequence. The alternative compliance enforcement systems that have been proposed in the literature also face substantial problems. A simple, flexible, potent, and credible compliance enforcement system for a post-Kyoto climate agreement, based on deposits, is proposed here: at ratification, each country deposits a significant amount of money, and continues to do so in the preparation stage each year until the start of the commitment period. At the end of this period, those countries that meet their emissions limitation targets receive a full refund of their deposit, while those that fail to do so forfeit part or all of it. A simplified two-country model of the deposit system and a numerical example of an agreement involving the US, Japan, Russia, and Europe is also provided. If each country's deposit is no less than its abatement costs, there is a strong incentive for participating countries to avoid non-compliance.     

Carbon dioxide emissions from Russia's electricity sector: future scenarios

Abstract

This article investigates future greenhouse gas emission scenarios for Russia's electricity sector, a topic of importance since Russia's ratification of the Kyoto Protocol in November 2004. Eleven scenarios are constructed to the year 2020 considering economic and technological details in both the demand and supply sides of the sector. The scenarios are based upon a thorough review of the different factors controlling carbon dioxide emissions, including potential economic growth, changes in energy efficiency and technological development, and that Russia may export large amounts of natural gas to European and Asian markets. The most likely scenario is that Russia will double industrial output over the next 10 years, increase energy efficiency in the demand sector, will remain consistent to the goals of the Energy Strategy 2020 and will implement more efficient technology in the electricity supply sector. Consequently, carbon dioxide emissions will still be 102 million tonnes below 1990 levels in 2010, representing a significant source for emission reduction credits available to be sold on international markets or transferred to the next crediting period.     

Optimal carbon dioxide abatement and technological change: should emission taxes start high in order to spur R&;D?

Many European politicians argue that the EU should set tougher emission targets than what is required by the Kyoto protocol, and moreover, that emission trading with other countries outside EU should be limited so as to keep emission quota prices high. One of the arguments, frequently cited for such a policy, is the need for technological development. However, the literature on climate change and technological innovation does not unambiguously support the need for setting high emission taxes today. In this paper we investigate the relationship between emission taxes and technological change further by modeling innovation activity explicitly. In our model both the amount of R&D and the amount of carbon abatement are decided in a decentralized way by the market as a response to an emission tax. Moreover, we introduce several distinct failures in the market for new innovations, among others, insufficient patent protection and intertemporal knowledge spill-overs. Our findings suggest that governments should under some circumstances set a higher carbon tax today if we have technological change driven by R&D than if we have pure exogenous technological change. Based on numerical simulations these circumstances are (a) positive intertemporal knowledge spillovers and/or (b) weak patent protection.     

Testing 100-Year Global Warming Potentials: Impacts on Compliance Costs and Abatement Profile

The comprehensive approach adopted in the Kyoto Protocol relies on the use of 100-year Global Warming Potentials (GWPs) to convert emissions of various gases to `carbon dioxide (CO<sub>2</sub>) equivalents'. This particular set of weights, or metric, has a limited capacity to handle the large variations in atmospheric adjustment times, and emissions of various gases that are equal in terms of `CO₂ equivalents' will not result in equal climatic effects. In this study, the 100-year GWP metric is assessed in the context of implementing the Kyoto Protocol. Using data from Norway, we explore how abatement policy formulated on the basis of 100-year GWPs compares to policies based on other metrics in terms of compliance costs and abatement profile, that is, the composition of the basket of gases reduced. We found that the costs for Norway change significantly when other metrics are used, but changes in the composition of the basket of gases are moderate. However, since compliance costs can be controlled through other mechanisms for post-Kyoto Protocols, the use of 100-year GWPs versus other metrics has little impact on the general formulation of Norwegian climate policy.     

The influence of negative emission technologies and technology policies on the optimal climate mitigation portfolio

Combining policies to remove carbon dioxide (CO₂) from the atmosphere with policies to reduce emissions could decrease CO₂ concentrations faster than possible via natural processes. We model the optimal selection of a dynamic portfolio of abatement, research and development (R&D), and negative emission policies under an exogenous CO₂ constraint and with stochastic technological change. We find that near-term abatement is not sensitive to the availability of R&D policies, but the anticipated availability of negative emission strategies can reduce the near-term abatement optimally undertaken to meet 2°C temperature limits. Further, planning to deploy negative emission technologies shifts optimal R&D funding from ??carbon-free?? technologies into ??emission intensity?? technologies. Making negative emission strategies available enables an 80% reduction in the cost of keeping year 2100 CO₂ concentrations near their current level. However, negative emission strategies are less important if the possibility of tipping points rules out using late-century net negative emissions to temporarily overshoot the CO₂ constraint earlier in the century.     

Design alternatives for a domestic carbon trading scheme in the United States

One critical aspect of the Kyoto Protocol is its flexibility in compliance. Countries or groups of countries are free to choose their own implementation strategies. Should the United States ratify the Protocol, it will most likely use emissions trading in some form to implement this accord. Two variations on a US domestic carbon trading system are presented here. One is an auction system controlling carbon at the point of energy production and distribution. The second is a hybrid system allocating permits to large combustors and controlling smaller sources through standards. Within this paper we describe and compare the main attributes of each system. Separate sections also discuss various methods for allocating permits and incorporating standards.     

Parallels in reactionary argumentation in the US congressional debates on the abolition of slavery and the Kyoto Protocol

Today, the United States is as dependent on fossil fuels for its patterns of consumption and production as its South was on slavery in the mid-nineteenth century. That US congressmen tend to rationalise fossil fuel use despite climate risks to future generations just as Southern congressmen rationalised slavery despite ideals of equality is perhaps unsurprising, then. This article explores similarities between the rationalisation of slavery in the abolition debates and the rationalisation of ongoing emissions of greenhouse gases in the US congressional debates on the Kyoto Protocol.