23 - How (and why) do climate policy costs differ among countries?

Summary

Introduction

There have been many studies of the cost to Annex B countries of meeting Kyoto Protocol commitments. Unfortunately for these analyses, the Protocol has proved to be a moving target in terms of its interpretation and likely implementation. In addition, the economic performance and future expectations for some parties also are changing, and with these changes come revisions in reference emissions, which have a strong influence on the projected cost of meeting Protocol requirements. Looking back across these studies, the progression of work can be divided into three broad phases. The first studies were conducted soon after the Protocol was signed in 1997, and they focused on carbon emissions from fossil fuels. Often they assumed an idealized system of harmonized carbon taxes, or cap-and-trade among all the Annex B parties, contrasting such systems with implementation without international permit trade but with an idealized trading system operating within each country (see, for example, Weyant and Hill [1999]). These studies showed a high cost of the Protocol with autarkic compliance, but huge benefits of international trading because it made Russian “hot air” (potentially tradable emission quotas in excess of their anticipated emissions) accessible to other Annex B parties.

A second phase of studies followed the final negotiations in Marrakech in 2001 (Manne and Richels, 2001; Babiker et al., 2002; Bohringer, 2002). By that time, the United States had withdrawn from the Protocol, and the potential contribution of Article 3.4 carbon sinks had been defined for each party.