Designing Climate Policy

The Challenge of the Kyoto Protocol

© 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



On the route from Kyoto

Joanna Depledge, UNFCCC Secretariat Bonn

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 Trading)
  • 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) and
  • the impacts of climate change and mitigation measures

Additionally, this paper examines the institutional and organisational framework for the implementation of the Kyoto Protocol.



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 subsidies.



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 Strategies" (ICLPIS).

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 Emissions:
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 power.


Design Options for Flexible Instruments

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 agreed on.

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 of Graz

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 policies.
  • 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 limited resources.


The Economic Impact of CO2 Reduction Policies on the Austrian Economy

Kurt Kratena, Austrian Institut of Economic Research, and Stefan P.Schleicher, University of Graz

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 considerations.



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, Belgium

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%.


© ACCC 01.11.2008


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