Assessing the costs of compliance: The Kyoto Protocol

Abstract:

After the political agreement at the Bonn climate talks, the Kyoto Protocol is now ready for ratification. Key policy questions surrounding the ultimate implementation of the Kyoto Protocol and any follow-up international agreement on climate protection require quantitative assessment, i.e. the use of analytical models that mimic the potential economic impacts of alternative emission reduction policies. This paper assesses the costs of compliance with the Kyoto Protocol. The simulation results reveal why the USA has withdrawn from the Kyoto Protocol, while several other Annex B countries have pushed for an implicit relaxation of their Kyoto targets. International trade in emissions significantly reduces the total costs of compliance with Kyoto. The paper also explores the robustness of results with respect to changes in the values of key elasticities as well as other major assumptions, such as the baseline growth path or the scope of the abatement coalition (Kyoto with and without the USA). The sensitivity analysis helps to create an understanding of key assumptions that determine the quantitative model results and the policy conclusions to be drawn.