Is Kyoto Fatally Flawed? An Analysis with Macgem

Abstract

In this paper we present some numerical simulations with the MacGEM model to evaluate the consequences of the recent Marrakesh agreements and the defection of the USA for the Kyoto Protocol. MacGEM is a global marginal abatement cost model for carbon emissions from fossil fuel use based on the GEM-E3-World general equilibrium. Nonparticipation of the USA causes the equilibrium carbon price in Annex B countries to fall by approximately 50% since an important share of permit demand falls out. Carbon sinks enhancement activities enable Parties to fulfil their reduction commitment at lower compliance costs and cause the equilibrium permit price to decrease by 40%. Finally, it is shown that the former Soviet Union and central European countries have substantial monopoly power in the Kyoto carbon permit market. We conclude that the recent accords have eroded completely the Kyoto Protocol's emission targets but that they have the merit to have saved the international climate change negotiation framework.

Keywords: Environmental Economics, Climate Change, Permit Trade, Kyoto Protocol, Carbon Sinks

JEL Classification: H0, H2, H3