The Economic and Environmental Implications of the Us Repudiation of the Kyoto Protocol and the Subsequent Deals in Bonn and Marrakech

43 Pages Posted: 10 Feb 2002

See all articles by Andreas Löschel

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

ZhongXiang Zhang

Tianjin University - Ma Yinchu School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

Taking account of sinks credits as agreed in Bonn and Marrakech, this paper illustrates how market power could be exerted in the absence of the US ratification under Annex 1 trading and explores the potential implications of the non-competitive supply behavior for the international market of tradable permits, compliance costs for the remaining Annex 1 countries to meet their revised Kyoto targets, and the environmental effectiveness. Our results show that the US withdrawal from the Kyoto Protocol has had by far the greatest impact on the environmental effectiveness of the Protocol. This would lead to no real emission reduction in all remaining Annex 1 regions. As the biggest single buyer on the permit market, the absence of US ratification would significantly reduce the demand for permits. Consequently, the price of permits under Annex 1 trading would drop to zero. While all remaining Kyoto-constrained Annex 1 countries would enjoy meeting their revised Kyoto targets at zero costs, seller countries with excess supply of hot air would lose all their revenues under perfect Annex 1 trading.

Given the former Soviet Union (FSU) and the Eastern European countries (EEC) as the dominant suppliers of emissions permits on the international market, it seems likely that they would exert market power to maximize their revenues from permit sales. Depending on how market power is exerted, our results show that the overall compliance costs of all remaining Annex 1 regions in the case of FSU cooperating with EEC could reach as much as two times that in the case of only FSU acting as a monopoly. But no matter how market power is exerted, all Kyoto-constrained Annex 1 regions are better off with emissions trading in terms of their compliance costs than with no trading at all. Moreover, curtailing permit supply by market power will cut the amount of hot air being emitted into the atmosphere by more than half and at the same time, increases Annex 1 domestic abatement efforts. Thus, the overall environmental effectiveness is increased, although it is much less under the market power scenarios examined than in the case of the ratification of all Annex 1 regions including the US.

Keywords: Climate policy, emission trading, market power, marginal abatement costs, Kyoto Protocol

JEL Classification: D43, Q43, Q48, Q25

Suggested Citation

Löschel, Andreas and Zhang, ZhongXiang, The Economic and Environmental Implications of the Us Repudiation of the Kyoto Protocol and the Subsequent Deals in Bonn and Marrakech (April 2002). FEEM Working Paper No. 23.2002; ZEW Discussion Paper No. 02-28. Available at SSRN: https://ssrn.com/abstract=299463 or http://dx.doi.org/10.2139/ssrn.299463

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

ZhongXiang Zhang (Contact Author)

Tianjin University - Ma Yinchu School of Economics ( email )

92 Weijin Road, Nankai District
Tianjin 300072
China
+86 22 87370560 (Phone)

HOME PAGE: http://ideas.repec.org/f/pzh243.html

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