The Kyoto Protocol Carbon Bubble: Implications for Russia, Ukraine, and Emission Trading

The emission targets adopted in the Kyoto Protocol far exceeded the likely level of emissions from Russia and Ukraine. These countries could sell their "bubbles" if the Protocol enters into force and industrialized countries establish an international emission trading system. Using the most recent, comprehensive scenarios for emissions of carbon dioxide from the energy system we estimate that during the Protocol's 2008-2012 "budget period" the bubble will range from 9MtC (million tons of carbon) to 900 MtC for Russia and 3 MtC to 200 MtC for Ukraine. Even scenarios with high economic growth and carbon-intensive technologies do not burst the bubble before the budget period. In the central ("middle course") scenario the total carbon bubble exceeds 100 MtC, is worth 22 to 170 billion US Dollars (4 to 34 billion US Dollars per year), and does not burst until 2040. This flow of assets, which could exceed Russian earnings from natural gas exports ($10 billion in 1997), is comparable with projected total investments in the Russian energy system for 2008-2012. If directed towards low-carbon infrastructure investments (e.g., gas pipelines, safe nuclear power), bubble transfers could reinforce and partially lock-in decarbonization of the world energy system.