UNFINISHED BUSINESS: The Economics of The Kyoto Protocol

The Kyoto Protocol to the Framework Convention on Climate Change (FCCC) was completed on the morning of December 11, 1997, following over two years of negotiations. The product of these deliberations is a complex and incomplete document knitting together the diversity of interests and perspectives represented by the more than 150 delegations. Because the document is complex, its implications are not immediately obvious. If it enters into force, the Kyoto Protocol will have far-reaching implications for all nations--both nations with obligations under the Protocol and those without obligations. National energy systems, and the world's energy system, could be forever changed. In this paper the authors develop an assessment of the energy and economic implications of achieving the goals of the Kyoto Protocol. They find that many of the details of the Protocol that remain to be worked out introduce critical uncertainties affecting the cost of compliance. There are also a variety of uncertainties that further complicate the analysis. These include future non-CO{sub 2} greenhouse gas emissions and the cost of their mitigation. Other uncertainties include the resolution of negotiations to establish rules for determining and allocating land-use emissions rights, mechanisms for Annex 1 trading, and participation by non-Annex 1 members in the Clean Development Mechanism. In addition, there are economic uncertainties, such as the behavior of Eastern Europe and the former Soviet Union in supplying emissions credits under Annex 1 trading. These uncertainties in turn could affect private sector investments in anticipation of the Protocol's entrance into force. The longer the nature of future obligations remains unclear, the less able decision makers will be to incorporate these rules into their investment decisions. They find that the cost of implementing the Protocol in the US can vary by more than an order of magnitude. The marginal cost could be as low as $26 per tonne of carbon if a global system of emissions mitigation could be quickly and effectively implemented. But it could also exceed $250 per tonne of carbon if the US must meet its emissions limitations entirely through domestic actions, and if mitigation obligations are not adequately anticipated by decision-makers