Estimating the Size of the Potential Market for the Kyoto Flexibility Mechanisms

Abstract:     
The Kyoto Protocol incorporates three flexibility mechanisms to help Annex I countries to meet their Kyoto targets at a lower overall cost. This paper aims to estimate the size of the potential market for all three mechanisms over the first commitment period. Based on the national communications from 35 Annex 1 countries, it first estimates the potential demand in the greenhouse gas offset market. Then, it assesses the implications of the EU proposal for ceilings on the use of flexibility mechanisms. Finally, using the global model based on the marginal abatement costs of the 12 regions, the paper estimates the contributions of flexibility mechanisms to meet total emissions reductions required of Annex 1 countries under the four trading scenarios. To our knowledge, this is the first comprehensive study to estimate the size of the potential market for Kyoto mechanisms and quantify the implications of the EU proposal on the basis of the individual national communications to the UNFCCC.

Keywords: Emissions trading, clean development mechanism, joint implementation, climate change, marginal abatement costs, Kyoto Protocol, United States, Japan, European Union, China, India

JEL Classification: Q28, Q25, Q48, Q43

Accepted Paper Series