© ACCC, edited by H. Abele, Th.
C. Heller, St. Schleicher
The Kyoto Protocol is an outstanding landmark
on a long journey to fight climate change.
This volume is intended to facilitate identifying dead ends
in the search for a global climate change. The papers originate
from a joint conference of the European Union and the United
States in September 1998 in Semmering, Austria.
Following the abstracts of the papers are available.
The publication can be ordered at amazon.de
On the route from Kyoto
Joanna Depledge, UNFCCC Secretariat
In December 1997 over 160 Parties to the UN
Framework Convention on Climate Change (UNFCCC) decided,
by consensus, to adopt the Kyoto Protocol. The Protocol
was opened for signature on 16 March 1998 to 15 March 1999.
When negotiators emerged from the exhaustion and excitement
of Kyoto they began to realize how much the negotiations
had left unresolved and how many decisions had been pushed
back to future meetings.The aim of this paper is to illuminate
some of the open questions of the Kyoto Protocol.
Following 3 key issues are discussed:
- the mechanisms for flexibility (Joint
Implementation, Clean Development mechanism and Emission
- the mechanisms for credibility
(The fate of the flexibility mechanisms depends largely
on "credibility mechanisms": They include measurement
and reporting, monitoring an verification, and non compliance)
- the impacts of climate change and
Additionally, this paper examines the institutional
and organisational framework for the implementation of the
The Climate for Greenhouse
Policy in the U.S. and the Incorporation of Uncertainties
into Integrated Assessments
Stephen H. Schneider, Department
of Biological Sciences , Stanford University
In the U.S. there is a rich debate over a range
of climate policies among the business, academic and government
analytic communities. U.S. Policy circles are enamored with
cost/benefit analysis via integrated assessment models.
This paper analyses how uncertainties especially
concerning the quantification of climate damages are treated
in these models under consideration that damage distributions
deriving from expert survey have large variances in the
magnitude of damage from unmitigated climate change.
Results suggest some ten percent subjective
probability that climate change would prove economically
beneficial, a comparable likelihood of catastrophic climate
surprises, and the "best guess" being a small
cost to the economy from carbon policies like a modest carbon
tax, tradable permit system or low carbon technology development
The Tolerable Windows Approach
to Global Warming
T. Bruckner, G. Petscheld-Held,
and F. Toth, Potsdam Institute for Climate Impact Research
The development of the Tolerable Windows Approach
(TWA) was motivated by the German Advisory Council (WBGU)
, which defined a "window of tolerable climate change
(WBGU, 1995) an proposed an inverse computation technique,
aimed at defining complete sets of possible emission paths
which would keep the global climate within the predefined
window. This approach became the conceptual cornerstone
of a new integrated assessment project at the PIK, which
is called "Integrated Assessment of Climate Protection
I a nutshell the TWA may be summarizes as follows:
On the basis of a set of pre-defines guard-rails
that exclude intolerable climate change on the one hand,
and unacceptable mitigation on the other, the admissible
scope for action is sought by investigating the dynamic
cause-effect relationship between society and environment.
In a subsequent step, a single climate protection strategy
may be selected by taking into account additional criteria.
This can be achieved, for instance, by applying quantitative
policy optimization methods (like cost-effectiveness models),
by referring to soft criteria and qualitative arguments
or by seeking a compromise during a negotiation process.
In the latter, it is assumed, that the approach
is applied to support a specific policy-maker (or a policy-making
body collectively) i.e. an unitary actor seeking scientific
advice about the difficult choices faced in the negotiation
process of the Framework Convention on Climate Change.
How to limit Greenhouse Gas
Lessons from Public Economic Theory
Peter J. Hammond, Department
of Economics, Stanford University
This paper gives an overview of important economic
questions related to Greenhouse Gas Abatement. (How to treat
a widespread externality, Review of arguments for a price
mechanism, Monitoring, How to organize a world market....)
Following conclusion a are drawn:
- Supplementing the Kyoto Protocol quotas
by allowing unrestricted international trade of emissions
seems desirable, provided measures are taken to protect
deserving losers whose livelihood may be at stake. The
losers need compensation.
- A Carbon Tax may be simpler because
it is effectively like requiring emission permits to be
bought at a fixed price. It could be combined with rebates
for some historical emissions, in order to replicate many
features of an emission trading scheme.
- When future target are being determined,
it might be useful to see what the market price is because
it is giving us some indication of what the marginal cost
of abatement really is. So some feedback from price to
quantity is also desirable. In particular, if the price
of permits is low, this is an indication that the marginal
cost of abatement is low, suggesting that the supply of
permits should be made more restrictive.
- Monitoring fuel outputs seems much
easier than trying to monitor emissions directly, and
may have desirable side effects.
- Giving national governments the right
to dispose of permits as they see fit offers them significant
Design Options for Flexible
Andries Nentjes, Department
of Economics and Public Finance, Faculty of Law University
of Groningen, The Netherlands
The Kyoto Protocol of December 1997 sets legally
binding emission targets and timetables for Annex I countries.
Among the mechanisms that have been accepted to enhance
cost effectiveness the Protocol is emission trading. Under
article 17 an Annex B country will be allowed to purchase
the right to emit greenhouse gases (GHG) from other Annex
B countries that are able to cut GHG emissions below their
"assigned amounts". Designing the rules governing emissions
trading has been deferred to subsequent conferences and
what exactly is meant by emission trading still has to be
What is exactly meant by emission trade? A rather
familiar view is that GHG emission trade is a transfer of
GHG quota between governments. Emission trade then is defined
as a public activity. An other view is to see emission trade
primarily as a transfer of emission quota between private
parties, in particular polluting industries. If such a trade
transaction is performed between sources located in different
countries it falls under the definition of article 17 of
the Kyoto Protocol. Whether the word 'emission trading'
in article 17 of the Kyoto Protocol refers to the 'government
trading' scheme, or to the 'sources trading' design, or
perhaps to both is presently a matter of political discussion.
In this paper the strengths and weaknesses of the two types
of emission trading will be compared and their implications
discussed. first a short presentation of government emission
trade is given; followed by a more extensive discussion
of a design for private emission trade. Then the major arguments
for and against the two schemes are given and rounded off
by the conclusions. In an addendum we summarize the results
of a Dutch study into the cost saving of emission trade
between end users in The Netherlands.
Flexible Instruments and
Induced Technological Change
Stefan P. Schleicher, University
The Kyoto Protocol (UNFCCC, 1997) allows Annex
B countries to achieve their emission targets supplemental
to domestic actions by so called flexible instruments that
involve transnational operations. These instruments comprise
Emissions Trading (ET), the international exchange of emissions
quota among Annex B countries, Joint Implementation projects(JI),
cooperations among Annex B countries that result in emissions
reductions, and Clean Development Mechanism projects (CDM),
similar cooperations between Annex B and Non-Annex B countries.
So far most attention seems to have been given
to ET. One reason being that analogies were drawn with other
trading schemes for emission permits, e.g. SO2
trading in the US. The arguments in favor of ET seem to
be extremely convincing: emission reductions should be made
where the (marginal) costs of emission reduction are the
lowest and trading of emission permits is a suitable mechanism
to exploit efficiency gains in terms of cost reduction.
We question this position as being potentially too simplistic
on of the following grounds:
- Cost minimization does not necessarily
imply maximization of welfare, both in a national and
global perspective. It is welfare, not just cost minimization,
which should be the ultimate target of emission reduction
- Different actions for emission reduction
generate different incentives for technical progress thus
generating feedbacks on abatement costs, economic activity
and economic welfare.
- Domestic efforts for emission reductions
and internationally implemented flexible instruments are
obviously not independent since they compete for the same
The Economic Impact of CO2
Reduction Policies on the Austrian Economy
Kurt Kratena, Austrian Institut
of Economic Research, and Stefan P.Schleicher, University
A linked input output/econometric model of the
Austrian economy with an energy block is used in this study
to assess sectoral effects of CO2 reduction.
The energy block and the other commodities are linked by
a partitioned i - o - model. The energy block is made up
by aggregate energy demand equations by activities and sub
demand systems of the translog type, where total energy
input is split up into different fuel types. The conversion
of energy is modelled by an I-O-model of the energy sector.
The input output/econometric model of the Austrian
economy is a simple closed i - o model with econometric
equations for final demand components, imports by goods
and employment by activities. Measures for CO2 reduction,
their impact on energy demand and their costs in terms of
additional capital goods are taken from detailed expert
studies and introduced in the model.
How to Implement Policies
and Instruments for the Post-Kyoto Process
Hanns Abele , Michael Winkler,
University of Economics, Vienna
It is tempting and may be rational to agree
on principles and modalities first and then proceed with
the process of implementation of the Kyoto-Protocol. However,
this approach may be flawed. The principles may not be independent
from each other, but even worse the set of possible implementations
for agreed principles may be empty despite every principle
alone making perfect sense.
To avoid this dilemma it might be advisable
to work from both ends, basic principle and specific implementation,
thus top down and bottom up, more inductively as well as
more deductive at the same time. This paper discusses not
only these general problems of implementing the Kyoto Protocol,
but also the specific problem of asymetric information between
individuals (nations, parties, legal entities) and the supervising
authority. Individuals have private information about their
emissions and monitoring is expensive, so verification of
emissions is based on the individuals primarily. But reports
only contain valuable information if there are incentives
to report the truth.
The purpose of this paper is to demonstrate
the ideas and problems of designing reasonable mechanisms
and to emphasise the necessity of incentive compatability
Designing Climate Policy
to Address Uncertainty
William Pizer, Ressources for
the Future, Washington, DC
Considering the uncertainties about climate
change mitigation costs equivalent price and quantity controls
lead to different outcomes. A price mechanism, such as a
carbon tax, fixes the incentive to reduce emissions. Optimizing
firms will reduce emissions until the costs of further reductions
exceeds the tax rate, equating marginal cost to the tax.
If uncertainty the exists about the marginal cost schedule,
the emission outcome under a price policy will be uncertain.
A quantity mechanism on the other hand , such
as a tradable permit system, fixes the emission level .
Like a tax , firms face a financial incentive in the form
of the permit price. Optimizing firms will reduce emissions
until the costs of further reductions exceeds the permit
price. However with a fixed number of permits the permit
price will rise or fall until the demand for permits exactly
matches the fixed supply.
Pizer compares these mechanisms and concludes
that, unless a rapidly stabilization of the greenhouse gas
concentration in the atmosphere is necessary, a quantity-based
target is not the optimal policy. In this case he argues
a price-based mechanism is more reasonable, where emissions
can to fluctuate in response to cost shocks: Encouraging
additional emissions when costs are low and fewer emissions
when cost are high, reduces, so Pizer, mitigation costs
and raises social welfare.
Does International Emissions
Trading Jeopardise Joint Implementation?
Distinguishing the Kyoto Mechanisms from Economic Perspectives
Josef Jansen, Institute for Economy
and the Environment, University of St. Gallen, Switzerland
The objective of this paper is to examine the
possible distinctions and interrelations between the Kyoto
Mechanisms from the economic perspective. In this paper,
first the Kyoto Mechanism as formulated in the Kyoto Protocol
are introduced. The next part of the paper explores how
distinctions and interrelations between Joint Implementation
(JI) and International Emission Trading (IET) have been
perceived in the pre-Kyoto regime. Then the distinctions
between JI and IET in the post-Kyoto regime are analysed
on the basis of different criteria. Furthermore this discussion
is related to the Clean Development Mechanism (CDM) This
paper concludes that convincing distinctions between JI,
CDM and IET may be drawn on the basis of the criteria cap-and-trade
versus baseline-and-credit systems and international
trade versus international production involving international
investments and that international investments are not a
constitutive feature of JI projects.
The Macroeconomic Impacts
of the 1997 EU Energy Tax Proposal
Ger Klaassen, IIASA Laxenburg,
Austria and Heinz Jansen, European Commission, Brussels,
This paper evaluates the macroeconomic and sectoral
impacts of the directive on energy and taxation of products
proposed by the European Commission in 1997. The analysis
was based on three different models. From a macroeconomic
perspective implementation of the proposed directive is
likely to confirm the possibility of a double dividend if
tax revenues are recycled to reduce the social security
contributions paid by employers. The proposed tax is expected
to lead to GDP and employment increase and CO2 emission
decreases. All three models confirm this. The positive EU-wide
impacts are generally valid for all countries. A few countries,
however, are left with small losses in GDP, even with revenue
recycling. Employment impacts are, however, positive in
all countries and CO2 emissions are reduced.
The impacts on specific sectors are relatively minor. Losses
of production, or value added, in the sectors most negatively
affected (gas distribution, energy-intensive industries)
are expected to be between 0.5 and 1.5%.