Global Warming: Looking Beyond Kyoto

6. Economic Analyses of the Kyoto Protocol: Is There Life after Kyoto?

This paper reviews different approaches to the political and economic control of global public goods like global warming. It compares quantityoriented control mechanisms like the Kyoto Protocol with price-type control mechanisms such as internationally harmonized carbon taxes. The pros and cons of the two approaches are compared, focusing on such issues as performance under conditions of uncertainty, the volatility of induced carbon prices, the excess burden of taxation and regulation, accounting finagling, corruption, and implementation. Although virtually all policies involving economic global public goods rely on quantitative approaches, price-type approaches are likely to be more effective and more efficient. After more than a decade of negotiations and planning under the United Nations Framework Convention on Climate Change (UNFCCC), the first binding international agreement to control the emissions of greenhouse gases has come into effect in the Kyoto Protocol. The first budget period of 2008–12 is at hand. Moreover, the scientific evidence on greenhouse warming strengthens steadily as observational evidence of warming accumulates. The institutional framework of the protocol has taken hold solidly in the European Union’s Emissions Trading Scheme (ETS), which covers almost half of Europe’s CO2 emissions. Notwithstanding this apparent success, the Kyoto Protocol is widely seen as somewhere between troubled and terminal. Early troubles came with the failure Economic Analyses of the Kyoto Protocol: Is There Life after Kyoto? william d. nordhaus 6 91 10865-07_PT3-CH06_rev.qxd 12/10/07 11:40 AM Page 91 to include the major developing countries along with lack of an agreed-upon mechanism for including new countries and extending the agreement to new periods. The major blow came when the United States withdrew from the treaty in 2001. By 2002, the protocol covered only 30 percent of global emissions, while the hard enforcement mechanism in the ETS accounts for about 8 percent of global emissions (see figure 6-1). Even if the current protocol is extended, models indicate that it will have little impact on global temperature change. Modeling estimates indicate that global emissions under the revised Kyoto Protocol will be very close to “business as usual.” Global emissions in 2010 under the current protocol are estimated to be 1.5 percent lower than a no-controls scenario, if the new forestry offsets are ignored (see figure 6-2). Unless there is a dramatic breakthrough or a new design, the protocol threatens to be seen as a monument to institutional overreach. 92 william d. nordhaus 20 40 60 80 Percent 2002/2010a 0 9 9 1 Kyoto Protocol with United States Kyoto Protocol without United States European trading scheme Source: The underlying model is described in William Nordhaus and Joseph Boyer, Warming the World: Economic Models of Global Warming (MIT Press, 2000), chap. 8. Input data are revised to reflect changes in trends since 1999. a. The date 2002 includes coverage of the Kyoto Protocol; 2010 includes application of the Emissions Trading Scheme. Figure 6-1. Fraction of World Emissions Covered by the Kyoto Protocol 10865-07_PT3-CH06_rev.qxd 12/10/07 11:40 AM Page 92 Nations are beginning to consider the structure of climate change policies for the period after 2008–12. Some countries, states, cities, companies, and even universities are adopting their own climate change policies. Are there in fact alternatives to the scheme of tradable emissions permits embodied in the protocol? The fact is that alterative approaches have not received a serious hearing among natural scientists or among policymakers. What are some of the alternatives?1 For global public goods, there are three potential approaches: command-andcontrol regulation, quantity-oriented market approaches, and tax- or price-based is there life after kyoto? 93 -45% -40% -35% -30% -25% -20% -15% -10% -5% 1995 2005 2015 2025 2035 2045 2055 2065 2075 Difference from base (percent) Original Kyoto Protocol Kyoto Protocol without United States Limit to 2x CO2 Source: The underlying model is described in Nordhaus and Boyer, Warming the World, chap. 8. Input data are revised to reflect changes in trends since 1999. a. Numbers are for total global industrial CO2 emissions and measure the percent reduction relative to a business-as-usual path of no emissions reductions (or zero carbon prices). “Original Kyoto Protocol” shows the impact of the protocol with U.S. participation. “Kyoto Protocol without U.S.” shows the impact of the protocol without the United States. “Limit to 2xCO2” shows the emissions reductions that would minimize...