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What Has the Kyoto Protocol Wrought? The Real Architecture of International Tradable Permit Markets

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  • Hahn, Robert W.
  • Stavins, Robert N.

Abstract

We investigate a central issue in the climate change debate associated with the Kyoto Protocol: the likely performance of international greenhouse gas trading mechanisms. Virtually all design studies and many projections of the costs of meeting the Kyoto targets have assumed that nations can establish an international trading program that minimizes the costs of meeting overall goals. We focus on one important issue that has received little, if any, attention: the interaction between an international trading regime and a heterogeneous set of domestic greenhouse policy instruments. That is an important issue because the protocol explicitly provides for domestic sovereignty regarding instrument choice and because it is unlikely that most countries will choose tradable permits as their primary domestic vehicle. Nations can minimize costs is all countries use domestic tradable permits systems to meet their national targets (allocate permits to private parties) and allow of international trades. But when some countries use nontrading approaches such as greenhouse gas taxes or fixed-quantity standards''which seems likely in the light of previous experience''cost minimization is not ensured. In those cases achieving the potential costs savings of international trading will require some form of project-by-project credit program, such as joint implementation. But theory and experience with such credit programs suggest that they are much less likely to facilitate major cost savings, because of large transaction costs, likely government participation, and the absence of a well-functioning market. Thus, individual nations' choices of domestic policy instruments to meet the Kyoto targets can substantially limit the cost-saving potential of an international trading program. An important trade-off exists between the degree of domestic sovereignty and the degree of cost-effectiveness. International permit trading remains an attractive approach to achieving global greenhouse targets. That suggests the need for policymakers to analyze the likely cost-savings from feasible, as opposed to idealized, international policy approaches to reducing emissions of greenhouse gases.

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Bibliographic Info

Paper provided by Regulation2point0 in its series Working paper with number 70.

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Date of creation: Feb 1999
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Handle: RePEc:reg:wpaper:70

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Web page: http://regulation2point0.org/

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Cited by:
  1. Olmstead, Sheila M. & Stavins, Robert N., 2010. "Three Key Elements of Post-2012 International Climate Policy Architecture," Discussion Papers dp-10-34, Resources For the Future.
  2. Scott Barrett & Robert Stavins, 2003. "Increasing Participation and Compliance in International Climate Change Agreements," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 3(4), pages 349-376, December.
  3. Stavins, Robert N., 2004. "Can an Effective Global Climate Treaty be Based on Sound Science, Rational Economics, and Pragmatic Politics?," Working paper 99, Regulation2point0.
  4. Matthew Ranson & Robert N. Stavins, 2012. "Post-Durban Climate Policy Architecture Based on Linkage of Cap-and-Trade Systems," NBER Working Papers 18140, National Bureau of Economic Research, Inc.
  5. Olmstead, Sheila M. & Stavins, Robert N., 2006. "An International Policy Architecture for the Post-Kyoto Era," Working paper 353, Regulation2point0.
  6. Olmstead, Sheila & Stavins, Robert, 2006. "An International Architecture for the Post-Kyoto Era," Working Paper Series rwp06-009, Harvard University, John F. Kennedy School of Government.
  7. Flachsland, Christian & Marschinski, Robert & Edenhofer, Ottmar, 2009. "Global trading versus linking: Architectures for international emissions trading," Energy Policy, Elsevier, vol. 37(5), pages 1637-1647, May.
  8. Federico Boffa & Stefano Clò & Alessio D'Amato, 2013. "Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty," Working Papers 5, Department of the Treasury, Ministry of the Economy and of Finance.

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