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The Economics of a Lost Deal: Kyoto - The Hague - Marrakesh

This paper examines prospects for compromise between competing perspectives on four key climate change issues: costs, level of domestic action, environmental integrity, and developing world involvement. It focuses on the policy issues stemming from uncertainty about abatement costs. Based on extensive simulations of a model integration tool, SAP12 (Stochastic Assessment of Climate Policies, 12 models), the analysis considers options for fine-tuning the Kyoto Protocol, such as concrete ceilings or levies on carbon imports; "environmental restoration payments" to be made on excess emissions; and credits for sequestration activities in Annex B countries. It demonstrates that a restoration payment (implemented through a safety valve) emerges as a superior means of addressing the cost uncertainty issue. The paper concludes that had this approach been taken at the COP6 climate negotiations in The Hague, there would have been substantial room for compromise on payments of $35 to $100 per ton of carbon. Examining the Marrakesh (COP7) climate accord, it derives some lessons for attempts at completing Kyoto's unfinished business or at moving on to a new framework.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Climate change, Kyoto protocol, uncertainty, restoration payment, climate policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No3-1

Published in Volume23, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.