Nota di Lavoro, Fondazione Eni Enrico Mattei 30. 2000
This paper examines the overall economics of the Kyoto Protocol on climate change, in three main parts. The first part explores the structure of the Protocol and how this matches against classical economic criteria of an 'optimal' climate change agreement. This discussion also considers the nature of and reasons for shortcomings, and the prospects for its evolution. Given the various flexibilities in the agreement, the Kyoto Protocol is far more economically efficient in its structure than any previous global environmental agreement. The central conclusion is that, from an economic perspective, the Protocol's structure for industrialised country commitments is as good as could reasonably be expected. The second part of the paper explores more closely the economics of the commitments themselves and how they combine with the various flexibilities, briefly reviewing the available literature and using a simple spreadsheet model of how the commitments might combine with trading mechanisms under a range of assumptions. Flexibility is intrinsic and necessary, but it is argued that the allocations to Russia and Ukraine in particular mean that unlimited flexibility could render the Protocol's commitments weaker in their impacts than is economically desirable to address climate change. It is argued that, should this prove to be the case, access to the large surplus in the transition economies could be used as a control valve to limit the costs of the Protocol to within acceptable limits. Finally, the paper considers the issues of developing country involvement in the Kyoto Protocol, and the Protocol's longer-term impact and evolution, including its impact on technological evolution and dissemination and the evolution of future commitments. It is argued that taking account of such issues critically affects views of the Protocol.