I NTERNATIONAL C LIMATE C HANGE A GREEMENTS : A N O VERVIEW Ann Chou April 14, 2010 Professor Nordhaus ECON 331b

T HE K YOTO P ROTOCOL Objective: Annex I countries commit to a 5% average decrease in 1990 global greenhouse gas emission levels during 5- year commitment period ( ) Current Standing: 36 of 37 Annex I countries have ratified Kyoto U.S. has not ratified Other UNFCCC members have ratifed but have no emission commitments

T HE K YOTO P ROTOCOL Characteristics: Binding targets for Annex I countries “Common but differentiated responsibilities” “Bank and Borrow” Flexibility Mechanisms International Emissions Trading Joint Implementation Clean Development Mechanism Consequences of non-compliance

CountryBase Year Emissions Kyoto Target (%) 2003 Emissions, % by which above or below Kyoto Target Australia Austria Belgium *Bulgaria Canada Croatia *Czech Republic Denmark *Estonia EU EU Finland *France Germany *Greece *Hungary

CountryBase Year Emissions Kyoto Target (%) 2003 Emissions, % by which above or below Kyoto Target *Iceland *Ireland Italy Japan *Lithuania Netherlands New Zealand *Poland *Romania *Slovakia Spain *Sweden Switzerland *Ukraine UK USA

M ODELING K YOTO : I S IT C OST - EFFECTIVE ? Manne and Richels use MERGE 3.0, Model for Evaluating Regional and Global Effects of greenhouse gas reduction policies An intertemporal market equilibrium model that maximizes discounted utility over nine regions Assumptions Endogenous technological diffusion Autonomous energy efficiency improvement rate of 40% of the rate of growth of GDP Try to answer… What is the problem of “carbon leakage?” What are the efficiency gains from flexible mechanisms?

K YOTO : “C ARBON L EAKAGE ” What is “carbon leakage”? The reduction in emissions by Annex I countries is offset by actions of non-Annex I countries Carbon leakage through… Price Comparative advantage Remedy: Subject everyone to emissions limits

K YOTO : W HY H AVE F LEXIBILITY M ECHANISMS ? Cost Effectiveness “Where” flexibility allows cost of mitigation to decrease significantly Allows countries to mitigate where the marginal costs are lowest Manne and Richels also find that any limits to carbon emission purchase results leads to inefficiency Best Solution: Allow full global trading without any carbon emission purchase constraints

K YOTO : W HY HAVE FLEXIBILITY MECHANISMS ? Joint Implementation Earn credit allowances through emission reduction units (ERU) when Annex I countries collaborate on emission removal or emission reduction project Clean Development Mechanism Earn credit allowances through emission reduction credits (CERs) when Annex I country finances emission removal or emission reduction projects in non-Annex I projects Jury is still out… Unclear rules and regulations—transaction costs CDM assumes that abatement or mitigation is cheaper in developing countries

T HE B IGGER P ICTURE : Objective: “… stabilization of greenhouse-gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system…”

T HE P ROBLEM OF N ON - PARTICIPATION AND N ON - COMPLIANCE Non-participation High economic costs Inefficiencies Notions of fairness E.g. United States passes Byrd-Hagel Resolution to not sign Kyoto 95-0 in the U.S. Senate. Non-compliance No enforcement measures Tragedy of the commons without full participation Challenges of international governance

C OPENHAGEN A CCORD A letter of intent… No deadline for renewal of binding international agreement No hard-and-fast rules to play by Long-term plans—2 degree Celsius target Developed countries pledged financial resources to developing countries Annex I and non-Annex I countries submit emissions reduction targets by Jan 2010 Non-Annex I/non-LDC must engage in nationally appropriate mitigation actions Non-Annex I/LDC under voluntary mitigation measures

C OPENHAGEN A CCORD Carbon Leakage Developing countries are involved in mitigation Moving towards full participation Cost-effectiveness by trading Still not trading NAMA and guaranteed funding from developed countries Decrease in transaction costs Non-participation/non-compliance U.S. and China participation Still no compliance measures

C ONCLUSION Findings from MERGE 3.0 study Greater trading is more cost-efficient and JI/CDM does not mirror trading Trading hould not be limited Carbon leakage Kyoto forever is, in the long-term, less stable for emissions mitigation and more costly Changes found in Copenhagen Participation of developing countries Incremental movement toward full global trading Weaknesses of long-term cost assessment All efficient solutions rely on full participation and full compliance—is this possible ?