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Estimating the size of the potential market for all three flexibility mechanisms under the Kyoto Protocol


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  • Zhang, ZhongXiang


The Kyoto Protocol is the first international environmental agreement that sets legally binding greenhouse gas emissions targets and timetables for Annex I countries. It incorporates emissions trading and two project-based flexibility mechanisms, namely joint implementation and the clean development mechanism to help Annex I countries to meet their Kyoto targets at a lower overall cost. This paper aims to estimate the size of the potential market for all three flexibility mechanisms under the Kyoto Protocol over the first commitment period 2008-2012, both on the demand side and on the supply side. Taking the year 2010 as representative of the first commitment period and based on the national communications from 35 Annex I countries, the paper first estimates the potential demand in the greenhouse gas offset market. We show that for most of the OECD countries excluding the EU, their Kyoto targets are stringent than they appear at first glance. Then, the paper addresses supplementarity constraints and provides a quantitative assessment of the implications of the EU proposal for concrete ceilings on the use of flexibility mechanisms for the division of abatement actions at home and abroad. Our results suggest that although the aggregate allowed acquisitions for the Annex I countries as a whole in 2010 from all three flexibility mechanisms under the two alternatives are well below 50% of the difference between the projected baseline emissions and the target in 2010, the proposed restrictions to each Annex I country vary, in some case even substantially. Finally, using the 12-region’s marginal abatement cost-based model, the paper estimates the contributions of three flexibility mechanisms to meet the total emissions reductions required of Annex I countries under the four trading scenarios, respectively. Our results clearly demonstrate that the fewer the restrictions on trading the gains from trading are greater. The gains are unevenly distributed, however, with Annex I countries that have the highest autarkic marginal abatement costs tending to benefit the most. With respect to non-Annex I countries, their net gains are highest when trading in hot air is not allowed. Because of a great deal of low-cost abatement opportunities available in the energy sectors of China and India and their sheer sizes of population, we found that the two countries account for about three-quarters of the total non-Annex I countries’ exported permits to the Annex I regions.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13088.

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Date of creation: Nov 1999
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Handle: RePEc:pra:mprapa:13088

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Keywords: Emissions trading; clean development mechanism; joint implementation; climate change; marginal abatement costs; Kyoto Protocol; United States; Japan; European Union; China; India;

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  1. Warwick J. McKibbin & Martin T. Ross & Robert Shackleton & Peter J. Wilcoxen, 1999. "Emissions Trading, Capital Flows and the Kyoto Protocol," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Special I), pages 287-333.
  2. Böhringer, Christoph, 1999. "Cooling down hot air: a global CGE analysis of post-Kyoto carbon abatement strategies," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 99-43, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Christopher N. MacCracken & James A. Edmonds & Son H. Kim & Ronald D. Sands, 1999. "The Economics of the Kyoto Protocol," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Special I), pages 25-71.
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Cited by:
  1. ZhongXiang Zhang, 2000. "Estimating the size of the potential market for the Kyoto flexibility mechanisms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 136(3), pages 491-521, 09.
  2. ZhongXiang Zhang, 2004. "The World Bank’s Prototype Carbon Fund and China," Working Papers, Fondazione Eni Enrico Mattei 2004.138, Fondazione Eni Enrico Mattei.
  3. Zhang, ZhongXiang, 2001. "An assessment of the EU proposal for ceilings on the use of Kyoto flexibility mechanisms," Ecological Economics, Elsevier, Elsevier, vol. 37(1), pages 53-69, April.
  4. Zhang, ZhongXiang, 2001. "An economic assessment of the Kyoto Protocol using a global model based on the marginal abatement costs of 12 regions," MPRA Paper 13148, University Library of Munich, Germany.
  5. Zhang, ZhongXiang, 2002. "The economic effects of an alternative EU emissions policy," Journal of Policy Modeling, Elsevier, Elsevier, vol. 24(7-8), pages 667-677, November.
  6. Haites, Erik & Missfeldt, Fanny, 2004. "Liquidity implications of a commitment period reserve at national and global levels," Energy Economics, Elsevier, Elsevier, vol. 26(5), pages 845-868, September.
  7. Zhang, ZhongXiang, 2006. "Toward an effective implementation of clean development mechanism projects in China," Energy Policy, Elsevier, Elsevier, vol. 34(18), pages 3691-3701, December.
  8. ZhongXiang Zhang, 2010. "China in the Transition to a Low-Carbon Economy," Working Papers, Fondazione Eni Enrico Mattei 2010.76, Fondazione Eni Enrico Mattei.
  9. Zhang, ZhongXiang, 2008. "Asian Energy and Environmental Policy: Promoting Growth While Preserving the Environment," MPRA Paper 12224, University Library of Munich, Germany.
  10. Zhang, Zhong Xiang, 2000. "Meeting the Kyoto Targets: the importance of developing country participation," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 200013, University of Groningen, CCSO Centre for Economic Research.
  11. Jacob Werksman & Kevin Baumert & Navroz Dubash, 2003. "Will International Investment Rules Obstruct Climate Protection Policies? An Examination of the Clean Development Mechanism," International Environmental Agreements: Politics, Law and Economics, Springer, Springer, vol. 3(1), pages 59-86, March.
  12. Zhang, ZhongXiang, 2000. "The size of the carbon market study: discussion," MPRA Paper 14507, University Library of Munich, Germany.


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