Caps and fences in climate change policies: Trade-offs in shaping post-Kyoto

The Kyoto Protocol is a first, small step towards mitigating global warming. In the post-Kyoto era much larger greenhouse gas (GHG) emissions reductions will be necessary to keep atmospheric GHG-concentration levels at a ‘safe’ level. Due to the more ambitious reduction targets that need to be set and the desirability of getting more countries involved, establishing a follow-up treaty of the Kyoto Protocol is a challenging task. This paper can be viewed as a sequel to a previous report assessing the impacts of a policy scenario in which industrialized countries in 2020 accept emission targets that are 30% below 1990 emission levels. Its aim is to provide an analysis of additional scenario’s over and above this case, thus providing policy makers with a wider spectrum of alternative post-Kyoto policy settings and their implications. The paper analyses the macro-economic consequences of post-Kyoto policies in 2020. The costs of climate policy are largely determined by three factors: the reduction target, the economic development in the underlying scenario without new climate policies and the design of that policy. We analyse several policy options against the background of a benchmark case from an earlier study: a global cap and trade system with a cap in 2020 for the countries of Annex I that will be 30% below their 1990 emissions. Amongst the policy options studied are: coalitions with (much) less than global coverage, limited trading possibilities (e.g. because of the requirement that at least half of the reduction target should be met domestically), full versus limited use of the Clean Development Mechanism (CDM) in incomplete coalitions and reduced ambitions by lowering caps or imposing carbon taxes of limited height. Thus, alternative tradeoffs between abatement costs and abatement efforts are established and discussed. We show that the abatement costs in the benchmark case are relatively modest. These costs will rise considerably with shrinking coalition size and with limited opportunities for emissions trade or CDM. If coalition size shrinks migration of energy-intensive activities to nonparticipating countries tends to increase. Costs will increase if the opportunities of CDM cannot be fully used when coalitions are incomplete. Seizing CDM opportunities will reduce emissions only in part, due to domestic leakage in the developing countries. Though, carbon tax systems may be as effective in reducing emissions as cap-and-trade systems, burding sharing over countries will be quite different.