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THE COSTS OF THE KYOTO PROTOCOL

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A MULTI-MODEL EVALUATION May, 1999

Pages vii-xliv

Introduction and Overview

by John P. Weyant and Jennifer Hill (Energy Modeling Forum, Stanford University)

This Special Issue of The Energy Journal represents the first comprehensive report on a comparative set of modeling analyses of the economic and energy sector impacts of the Kyoto Protocol on Climate Change. Organized by the Stanford Energy Modeling Forum (EMF), the objectives of this study were the same as for previous EMF studies: (1) identifying policy-relevant insights and analyses that are robust across a wide range of models, (2) providing explanations for differences in results from different models, and (3) identifying high priority areas for future research. This study has produced a particularly rich set of results in all three areas, which is a tribute to the active participation of the modeling teams and the care each team took in preparing its paper. The volume consists of a paper by each modeling team on what it did and what it concluded from the model runs that were undertaken, proceeded by this introduction and summary paper. This summary focuses on the motivation for the study, the design of the study scenarios, and the interpretation of results for the four core scenarios, which all the teams ran. Each succeeding chapter contains ideas and insights drawn by the modeling teams from applying their models to issues they were able to address selected from a small set of important areas on which the group had mutually agreed to focus.

Pages 1-24

The Kyoto Protocol: A Cost-Effective Strategy for Meeting Environmental Objectives?

by Alan S. Manne (Professor Emeritus of Operations Research, Stanford University) and Richard Richels (Electric Power Research Institute, Palo Alto, CA)

Abstract

This paper has three purposes: 1) to identify the nearterm costs to the United States of ratifying the Kyoto Protocol; 2) to assess the significance of the Protocol's "flexibility provisions"; and, 3) to evaluate the Kyoto targets in the context of the longterm goal of the Framework Convention. We find that the shortterm U.S. abatement costs of implementing this Protocol are likely to be substantial. These costs can be reduced through international trade in emission rights. The magnitude of the costs will be determined by the number of countries participating in the trading market, the shape of each country's marginal abatement cost curve, and the extent to which buyers can satisfy their obligation through the purchase of emission rights. Finally and perhaps most important: unless the ultimate concentration target is well below 550 ppmv, the Protocol seems to be inconsistent with a longterm strategy for stabilizing global concentrations.

Pages 25-72

The Economics of the Kyoto Protocol

by Christopher N. MacCracken, James A. Edmonds, Son H. Kim and Ronald D. Sands (PNNL, Pacific Northwest National Laboratory, Washington, DC)

Abstract

In this paper we use the Second Generation Model to develop an assessment of the energy and economic implications of achieving the goals of the Kyoto Protocol. We find that many of the details of the Protocol that remain to be worked out introduce critical uncertainties affecting the cost of compliance. Our analysis shows that the cost of implementing the Protocol in the United States can vary by more than an order of magnitude. The marginal cost in 2010 could be as low as $26 per tonne of carbon if a global system of emissions mitigation could be quickly and effectively implemented. But it could also exceed $250 per tonne of carbon if the United States must meet its emissions limitations entirely through domestic actions, and if mitigation obligations are not adequately anticipated by decision-makers.

Pages 73-92

Adjustment Time, Capital Malleability, and Policy Cost

by Henry D. Jacoby and Ian Sue Wing (Joint Program on the Science and Policy of Global Change, Massachusetts Institute of Technology, Cambridge, MA)

Abstract

The cost of meeting Kyoto-style emissions reductions is heavily dependent on the malleability of an economy's stock of capital and the number of years available for adjustment. Each year of delay introduces more emission-producing activities that must be squeezed out of the system and shortens the time horizon for change, raising the carbon price required to produce the needed changes in capital structure. The MIT Emissions Prediction and Policy Assessment model is used to explore the effects of uncertainty in the degree of capital malleability in the short run, and to analyze how implied carbon prices vary depending on the time of credible commitment to emissions targets.

Pages 93-130

Requiem for Kyoto: An Economic Analysis of the Kyoto Protocol

by William D. Nordhaus and Joseph G. Boyer (Department of Economics, Yale University, New Haven, CT)

Abstact

This paper uses the newly developed RICE-98 model to analyze the economics of the Kyoto Protocol. It analyzes versions of the Kyoto Protocol that have different approaches to trading emissions rights and compares these with efficient approaches. The major conclusions are: (a) the net global cost of the Kyoto Protocol is $716 billion in present value, (b) the United States bears almost two-thirds of the global cost; and (c) the benefit-cost ratio of the Kyoto Protocol is 1/7. Additionally, the emissions strategy is highly cost-ineffective, with the global temperature reduction achieved at a cost almost 8 times the cost of a strategy which is cost-effective in terms of "where" and "when" efficiency. These conclusions assume that trading in carbon permits is allowed among the Annex I countries.

Pages 131-156

Kyoto, Efficiency, and Cost-Effectiveness: Applications of FUND

by Richard S.J. Tol (IVM, Institute for Environmental Studies, Vrije Universiteit, Amsterdam)

Abstract

In this paper various emission reduction scenarios are evaluated with FUND—the Climate Framework for Uncertainty, Negotiation, and Distribution model. The aim is to help international negotiators improve upon the Kyoto Protocol. International cooperation in greenhouse gas emission reduction is important, and the more of it the better. The emission reduction targets as agreed in the Kyoto Protocol are irreconcilable with economic rationality. If the targets nevertheless need to be met, it is better to start emission reduction sooner than later in order to minimise costs. Methane emission reduction may be an important instrument to reduce costs.

Pages 157-176

Analysis of Carbon Emission Stabilization Targets and Adaptation by Integrated Assessment Model

by Atsushi Kurosawa (Research and Development Division, Institute of Applied Energy, Tokyo), Hiroshi Yagita, Zhou Weisheng, Koji Tokimatsu (RITE, Research Institute of Innovative Technology for the Earth, Japan) and Yukio Yanagisawa (Global Environmental Engineering Program, University of Tokyo).

Abstract

This paper proposes a new framework for integrated assessment models of global environmental issues, including energy, climate, land use, macroeconomics, and environmental impacts. We conducted simulations on carbon emission stabilization in regions specified at the Third Conference of the Parties to the United Nations Framework Conventions on Climate Change (UNFCCC/COP3). Adaptation strategies including technology choice, conservation and carbon emission certificate trade are evaluated. We find that carbon certificate trade is potentially effective in averaging relative impact in macroeconomic activity.

Pages 177-206

Clubs, Ceilings and CDM: Macroeconomics of Compliance with the Kyoto Protocol

by Johannes Bollen (RIVM, National Institute of Public Health and the Environment, The Netherlands), Arjen Gielen (Ministry of Economic Affairs, The Netherlands), and Hans Timmer (CPB, Netherlands Bureau for Economic Policy Analysis).

Abstract

The Kyoto Protocol suggests that imposing restrictions on emission trade among Annex I countries may force domestic action in each country. The Protocol also mentions the Clean Development Mechanism (CDM) as an instrument to extend trade to countries outside Annex I. We analyze both restrictions on and extensions of permit trade among Annex I countries. We use the applied general equilibrium model WorldScan in this analysis. We show that, compared to unrestricted trade, the USA tends to gain from restrictions on emission trade while other OECD countries are likely to be harmed. We further show that restrictions probably do not prevent so-called hot air in the former Soviet Union from being used. On the contrary, restrictions tend to increase global emissions. Finally, we conclude that CDM can be an efficient option to reduce abatement costs, but certain conditions should be fulfilled to avoid severe carbon leakage.

Pages 207-220

Analysis of Post-Kyoto Scenarios: The Asian-Pacific Integrated Model

by Mikiko Kainuma (Global Environment Division, National Institute for Environmental Studies, Japan) and Yuzuri Matsuoka (Faculty of Engineering, Kyoto University) and Tsuneyuki Morita (Global Environment Division, National Institute for Environmental Studies, Japan).

Abstract

The AIM/top-down model is a recursive general equilibrium model used to analyze the post-Kyoto scenarios presented by EMF16. Differences among scenarios mainly arise from the setting of emission trading. Japan's marginal cost is the highest among the Annex I countries except New Zealand, where a relatively high emission reduction is necessary, while the highest GDP loss is observed in the USA in 2010 in the no trading case. The marginal costs are much less in the global trading case. The countries of the former Soviet Union sell emission rights and the USA buys the largest amount of them. Emission reductions by trading will account for a large part of the total emission reductions if there is no restriction on trading. The GDP gain of the former Soviet Union is the largest in 2010 in the trading cases. The GDP change in Middle East Asia is negative, and reaches the highest level in the no trading case. Carbon leakage is particularly observed in the no trading case.

Pages 221-256

Effects of Restrictions on International Permit Trading: The MS-MRT Model

by Paul M. Bernstein, W. David Montgomery (Charles River Associates, Inc.), Thomas F. Rutherford (Department of Economics, University of Colorado) and and Gui-Fang Yang (Charles River Associates, Inc.)

Abstract

This paper assesses the economic impacts of carbon abatement programs proposed under the Kyoto protocol: the distribution of economic burden across countries and regions, the implications for international competitiveness, and the consequences of international permit trading. Our analysis is based on a dynamic global trade model which accounts for systematic differences in the energy efficiency of production in industrial and developing countries. Emission limits adversely affect the welfare of industrial and some developing countries, including all of the oilexporting countries. Imports from AnnexB countries become more costly while demand for most developing country exports is reduced. Oil prices simultaneously fall, so the net impact on oilimporting developing countries is ambiguous. Energyintensive industries have a strong economic incentive to relocate production to lowenergy cost developing countries. Global trading in emission rights provides the lowest cost path to Kyoto, but it is unclear whether there are incentives for all nonAnnex B countries to participate.

Pages 257-286

The Kyoto Protocol: An Economic Analysis Using GTEM

by Vivek Tulpulé, Stephen Brown, Jaekyu Lim, Cain Polidano, Hom Pant and Brian S. Fisher (ABARE, Australian Bureau of Agricultural and Resource Economics, Canberra, Australia)

Abstract

In this paper ABARE's Global Trade and Environment Model (GTEM) is used to analyse the potential of international emissions trading as a mechanism for helping to achieve the abatement commitments agreed to in the Kyoto Protocol. The prospect of two emission trading blocs, one consisting of the European Union and eastern Europe and the other consisting of many of the remaining Annex I regions, is also considered. The analysis shows that the carbon penalty varies significantly across regions when no emissions trading is allowed. In aggregate, the cost of abatement to Annex I regions falls with emissions trading. Under the assumption of the two trading blocs, the carbon penalty in the European bloc is higher than with full Annex I trading. The paper also considers the impact on developing countries and the role of carbon leakage in determining the economic impacts on Annex I regions.

Pages 287-334

Emissions Trading, Capital Flows and the Kyoto Protocol

by Warwick J. McKibbin (Asia Pacific School of Economics and Management, Australian National University; and The Brookings Institution), Martin T. Ross, Robert Shackleton (U.S. Environmental Protection Agency) and Peter J. Wilcoxen (Department of Economics, University of Texas at Austin; and The Brookings Institution, Washington).

Abstract

We use an econometrically estimated multi-region, multi-sector general equilibrium model of the world economy to examine the effects of the tradable emissions permit system proposed in the 1997 Kyoto protocol, under various assumptions about that extent of international permit trading. We focus, in particular, on the effects of the system on international trade and capital flows. Our results suggest that consideration of these flows significantly affects estimates of the domestic effects of the emissions mitigation policy, compared with analyses that ignore international capital flows.

Pages 335-366

The Economic Implications of Reducing Carbon Emissions: A Cross-Country Quantitative Investigation Using the Oxford Global Macroeconomic and Energy Model

by Adrian Cooper, Scott Livermore, Vanessa Rossi, Alan Wilson and John Walker (Oxford Economic Forecasting Limited, Oxford, United Kingdom)

Abstract

This paper presents the results of a series of simulations analysing the implications of measures to reduce carbon emissions in Annex 1 countries, conducted using the Oxford Global Macroeconomic and Energy Model. It shows that the GDP costs of reducing carbon emissions vary significantly across countries and that the cost depends on a number of critical factors including energy intensity, the rise in emissions in the base case and the amount of coal used especially in electricity generation. Moreover, it illustrates that a combination of macroeconomic rigidities and monetary policy responses to higher energy prices means that the output losses are likely to be substantial in the years immediately following the introduction of a carbon tax or similar emissions abatement policy.

Pages 367-390

CO2 Emissions Control Agreements: Incentives for Regional Participation

by Stephen C. Peck (EPRI, Electric Power Research Institute, Palo Alto, CA) and Thomas J. Teisberg (Teisberg Associates, Charlottesville, VA)

Abstract

This paper explores the incentives for participation in international CO2 control agreements using tradable emission permits. We employ a welfare analysis in a two-region model to explore these incentives. The two regions are Annex-I (A-I) and Non-Annex I (Non-A-I). A key insight underlying the analysis is that emission permit allocations must not depart too far from optimal emissions paths, to avoid creating future incentives to drop out of the agreement. We find a range of permit allocations that improves the welfare of both the Annex-I and the Non-Annex I, and compare them with allocations based on regional population or GDP. In addition, we examine the implications of the Kyoto agreement in the context of this welfare analysis. We find that the Kyoto agreement transfers wealth from A-I to the Non-A-I, while failing to realize the efficiency gains to be hoped for from an agreement to control CO 2 emissions.