Permit trading under the Kyoto Protocol and beyond

Abstract

Conclusion: We have provided evidence from a global economics model, that if the Kyoto Protocol can be made binding there is likely to be a reduction in greenhouse gas emissions at relatively low cost if permit trading is implemented and if all countries and not just Annex 1 countries participate. The appeal of an international permits program is strongest if participating countries have very different marginal costs of abating carbon emissions – in that situation, the potential gains from trade are largest. Our results show that within the Annex I and globally, abatement costs are indeed quite heterogeneous. The marginal cost of meeting Kyoto targets in the “Rest of the OECD” region is triple that of United States; and large quantities of relatively inexpensive emission reductions are available from the former Soviet Bloc and non-Annex I developing regions. These differences in abatement costs are caused by a range of factors including different carbon intensities of energy use, different substitution possibilities and different baseline projections of future carbon emissions. Because of these differences, international trading offers large potential benefits to parties with relatively high mitigation costs. Despite the attractiveness of permit trading , we argue that the Kyoto Protocol is fatally flawed because it does not address the problem of sustainability. A number of ways in which the protocol may collapse are presented. The most obvious example is the collapse of the permit price if a country reneges on the agreement. We also propose an alternative regime that is designed to yield the goals of UNFCCC but is more likely to be sustainable because it addresses some of the fundamental weaknesses of the Kyoto style approach to environmental policy. Our regime relies on a decentralized but coordinated system of permits and user fees that are maintained by individual governments. We remove the problems of international permit trading while using a permit trading scheme as a basis for our proposal in a way that addresses both the economic and political sustainability issues directly in regime design. It would have been better to have the debate about the sustainability of a regime, designed to meet the goals of the UNFCCC, before the political negotiations produced a protocol with the flaws that are potentially in the Kyoto Protocol. Nonetheless, it is not too late to have this debate, especially when one considers that the possible collapse of the Kyoto Protocol over the next decade will make the development of a realistic policy that actually slows greenhouse emissions, that much harder to achieve.