Long live the Kyoto Protocol

Richard Tol 23 January 2010

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The 15th Conference of the Parties to the UN Framework Convention on Climate Change, which met last month in Copenhagen, is widely considered to have failed. After two weeks, negotiators returned home with vague pledges and unfinished drafts. The only firm commitment is to meet again in another year.

This failure was widely anticipated. A cynic would wonder why COP15 would succeed where COP14 failed. A game theorist, however, would point out that it is difficult to provide a global public good such as greenhouse gas emission reduction and that international environmental agreements cannot be stringent (Carraro and Siniscalco 1992, Carraro and Siniscalco 1993).

Back in 1994, Scott Barrett showed that stable treaties have either a large number of signatories who commit to very little, or a small number of signatories who commit to more ambitious targets (Barrett 1994). Despite the best efforts of a fair number of smart people to prove Barrett wrong (Dellink et al. 2008, Eyckmans and Tulkens 2003, Finus and Rundshagen 1998, Yang 2003), his result still stands. Indeed, Brazil, China, India, South Africa and the US ignored the other 188 countries in Copenhagen and agreed their own accord.

What next? Kyoto does not expire, only the targets

The question is what to do now that Copenhagen has failed. The fundamental positions of the main countries involved in climate policy are unlikely to change much over the next few years, so the next rounds of the negotiations will probably be a repetition of the moves in Copenhagen – with a similar non-result.

But there is a “plan B”. The Kyoto Protocol was initiated in 1997, completed in 2001, and entered into force in 2005. There are two components to the Kyoto Protocol.

  • First, some countries have emissions targets for the period 2008-2012.
  • Second, there are “international flexibility mechanisms”.

Importantly, there is no sunset clause in the Kyoto Protocol. The targets will become obsolete in 2013, but the mechanisms will remain in force.

The Kyoto Protocol is therefore the default option. The US is the only substantial country that has not ratified the Kyoto Protocol – but it didn’t reject it either; the Kyoto Protocol was never put to a vote in the Senate. The US primarily objected to the targets in the Kyoto Protocol, so a ratification after 2012 could be uncontroversial.

Is Kyoto enough?

Is the default any good? In order to answer that question, we need to look at the best international climate regime that is feasible. (The best, but infeasible option is a global carbon tax as Nordhaus and Yang 1996 argue.)

How would one structure international climate policy? A few point condition the answer to this question.

  • First of all, it is futile to try and negotiate legally binding targets for sovereign nations.

This is why the Kyoto Protocol has targets for only a minority of countries (the rich ones) and why some of these countries did not ratify the treaty (US) or withdrew after ratification (Canada). The basis for climate policy lies in a domestic demand for climate policy – not in a multilateral agreement or a supranational command.

  • Second, unilateral emission reduction is expensive (Hoel 1991).

Emission abatement increases the cost of energy, and this puts a country at a competitive disadvantage in product and capital markets. A country would therefore hesitate to reduce its emissions if it suspects that other countries would not follow. A country would need to know about the climate policies of its trading partners before it can decide on the stringency of its own policy. International climate policy thus requires a forum through which countries can gain confidence in each other’s climate policies. The annual meetings of UN Framework Convention on Climate Change provide a platform for such a system of pledge and review. The Framework Convention also regulates reporting of standardised emissions data, so that countries can monitor progress.

  • Third, the costs of emission reduction vary widely between countries.

Roughly, the demand for lower emissions is greater in richer countries, while it is cheaper to reduce emissions in poorer countries. The second element required for international climate policy, therefore, is a mechanism to arbitrage supply and demand. There are three options (bar international tax harmonisation, which is a non-starter even in the EU). The first option is a multilateral fund, financed by voluntary contributions, that would purchase emission reduction wherever it is cheapest (Bradford 2008). This option is used, inter alia, for peacekeeping operations, for health care, and for development aid. The World Bank and regional development banks are already engaged in this.

Another option is to link two or more domestic markets for emission permits (Rehdanz and Tol 2005). Permits are government licences rather than commodities, so governments would need to recognise each other’s permit. Permit trade is as advantageous as trade in commodities. Indeed, it is profitable for countries with low emission abatement costs to create a permit market just for the export opportunities (Tol and Rehdanz 2008). Exchange rates are needed to account for differences in the legal definition of a “ton of carbon dioxide”, and perhaps for differences in monitoring, enforcement and stringency (Rehdanz and Tol 2005). Rating agencies could play a useful role in this. For a brief period before the European Trading System was created, there was bilateral trade in emission permits between Denmark and the UK.

The Kyoto Protocol also has “international flexibility mechanisms”, through which private and public actors create and trade emission reduction credits (Michaelowa and Jotzo 2005), also in countries without emissions targets. This has created a burgeoning industry with a lively trade in emission credits.

All three flexibility options are needed to cater for the vastly different demands and capabilities of countries. The multilateral route is probably the only feasible one in least developed countries. The Kyoto mechanisms have proved to be reasonably successful in emerging economies. Joined-up domestic permit markets are an option for countries with an emissions cap and the wherewithal to regulate a market in government licenses.

Conclusion

In sum, Kyoto provides us with all the tools needed for international climate policy:

  • international monitoring of emissions data;
  • a forum to pledge domestic action and review progress; and
  • international flexibility in emission reduction.

The international climate negotiations planned for Mexico for 2010 and Johannesburg for 2011 should focus on refining existing agreements, particularly on the instruments of international climate policy. Moreover, this would quickly bore the media circus, so that negotiators can focus on the issue at hand instead of trying to impress the voter at home.

What is most needed, however, is a continued appetite for climate policy among the electorates, even if that means higher taxes and dearer energy.

References

Barrett, Scott (1994), “Self-Enforcing International Environmental Agreements”, Oxford Economic Papers, 46, 878-894.

Bradford, David F (2008), “Improving on Kyoto: Greenhouse Gas Control as the Purchase of a Global Public Good”, in The Design of Climate Policy, R. Guesnerie and H. Tulkens (eds.), MIT Press, Cambridge, pp. 13-36.

Carraro, Carlo and Domenico Siniscalco (1992), “The International Dimension of Environmental Policy”, European Economic Review, 36, 379-387.

Carraro, Carlo and Domenico Siniscalco (1993), 'Strategies for the International Protection of the Environment', Journal of Public Economics, 52, 309-328.

Dellink, Rob B, Michael Finus, and Niels Olieman (2008), “The Stability Likelihood of an International Climate Agreement”, Environmental and Resource Economics, 39, 357-377.

Eyckmans, Johan and Henry Tulkens (2003), “Simulating coalitionally stable burden sharing agreements for the climate change problem”, Resource and Energy Economics, 25, 299-327.

Finus, Michael and Bianca Rundshagen (1998), “Toward a Positive Theory of Coalition Formation and Endogenous Instrumental Choice in Global Pollution Control”, Public Choice, 96, 145-186.

Hoel, Michael (1991), “Global Environmental Problems: The Effects of Unilateral Actions Taken by One Country”, Journal of Environmental Economics and Management, 20, 55-70.

Michaelowa, Axel and Frank Jotzo (2005), “Transaction costs, institutional rigidities and the size of the clean development mechanism', Energy Policy, 33, 511-523.

Nordhaus, William D and Zili Yang (1996), “RICE: A Regional Dynamic General Equilibrium Model of Optimal Climate-Change Policy”, American Economic Review, 86(4): 741-765.

Rehdanz, K and Richard SJ Tol (2005), “Unilateral regulation of bilateral trade in greenhouse gas emission permits”, Ecological Economics, 54, 397-416.

Tol, R.S.J. and Katrin Rehdanz (2008), “A No Cap But Trade Proposal for Emission Targets”, Climate Policy, 8(3): 293-304.

Yang, Zili (2003), “Reevaluation and renegotiation of climate change coalitions - a sequential closed-loop game approach”, Journal of Economic Dynamics & Control, 27: 1563-1594.

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Topics:  Environment

Tags:  Kyoto Protocol, climate change, Copenhagen

Professor or Economics, University of Sussex; and Professor of the Economics of Climate Change, Vrije Universiteit Amsterdam

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