U.S. Rejection of the Kyoto Protocol: The Impact on Compliance Costs and Co2 Emissions

Abstract

Despite the US rejection of the Kyoto Protocol, the meeting of the parties to the UN Framework Convention on Climate Change in July 2001 has increased the likelihood that the Protocol will be ratified. This raises a number of issues concerning mitigation costs, particularly for the buyers and sellers of emission permits. In this paper, we examine how the US decision is likely to affect compliance costs for other Annex B countries during the first commitment period. We also explore the implications for US emissions. Key findings include:

1. Participating OECD countries may experience a decline in mitigation costs, but because of the banking provision contained in the Protocol, the decline may not be as great as some would suggest.

2. If the majority of "hot air" is concentrated in a small number of countries in Eastern Europe and the former Soviet Union, these countries may be able to organize a sellers' cartel and extract sizable economic rents; and

3. Even in the absence of mandatory emission reduction requirements, US emissions in 2010 may be lower than their business-as-usual baseline because of expectations regarding future regulatory requirements.