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Estimating the CDM market under the Bonn Agreement

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  • Jotzo, Frank
  • Michaelowa, Axel

Abstract

We analyse the impact of the agreement on implementation of the Kyoto Protocol achieved at COP6bis in Bonn in July 2001 on investment in greenhouse gas emission reduction projects in developing countries through the Clean Development Mechanism (CDM). The required actual emission reductions for participating Annex B countries overall will be relatively small, as the United States do not intend to ratify the Protocol and significant amounts of carbon sequestered in domestic sinks will be credited to Annex B countries under Article 3.4 of the Protocol. In addition, there is a large potential supply of surplus emissions quota (hot air) from Russia and other economies in transition. This means that demand for certified emission reductions (CERs) from CDM projects will be relatively small. The magnitude of the CDM as a means for meeting Kyoto Protocol commitments, and individual countries' shares, will be influenced by a host of factors both on the demand and the supply side of the global carbon market. The analysis is based on a quantitative model of the global carbon market, based on marginal abatement cost curves and designed specifically for this type of analysis. We estimate required emission reductions in Annex B countries, the share of the Kyoto mechanisms in meeting this demand, the price for CERs, and the geographical distribution of CDM projects, and discuss distribution of sequestration projects. A ?low demand, low price? carbon market scenario appears likely, with intense competition between developing countries to attract CDM investors. Sensitivity analysis illustrates the likely direction and magnitude of impacts when key supply and demand parameters are changed. We examine the impact of higher or lower implementation and transaction costs, as well as expanding or contracting the supply of CERs through baseline and additionality rules. While the CDM could suffer a loss in competitiveness if transaction costs are too high, changes in CDM supply parameters do not fundamentally change estimates of CDM size and revenue. On the demand side by contrast there are there are a number of factors which could greatly reduce the size of the CDM, or even preclude commercially driven CDM projects altogether. Key factors that could harm the CDM are lower business-as-usual emissions growth in Annex B countries, higher supply of surplus emissions quota (hot air) from EIT countries, and possibly crediting under Article 3.4 of sequestration in agricultural soils. If however the United States participated in implementing the Kyoto Protocol, none of these factors would be a threat to a viable and sizeable CDM. We conclude that although the potential role for the CDM is seriously diminished under the Bonn agreement and without the United States on board, a significant amount of CDM projects in developing countries could still be achieved. Much will depend on international market factors, as well as the design of rules for CDM project implementation. The best strategy is to prepare to be competitive in a low-demand, lowprice market, and at the same time to strive for the United States to still come on board the Kyoto Protocol. -- Wir analysieren die Auswirkungen des Bonner Abkommens zur Umsetzung des Kyoto- Protokolls vom Juli 2001 auf Projekte zur Verringerung von Treibhausgasen in Entwicklungsländern (Clean Development Mechanism, CDM). Die von den Industrieländern insgesamt geforderte Emissionsverringerung ist bei Nichtteilnahme der USA relativ gering, da erhebliche Mengen in heimischen Senken gespeicherten Kohlenstoffs unter Art. 3.4 des Kyoto-Protokolls angerechnet werden. Außerdem gibt es ein großes Angebot überschüssiger Emissionsrechte aus Russland und anderen Transformationsländern (sogenannte ?heiße Luft?). Daher wird die Nachfrage nach zertifizierten Emissionsreduktionen (CERs) aus CDM-Projekten relativ gering sein. Das Gesamtvolumen des CDM und der Anteil einzelner Länder wird durch eine Vielzahl von Faktoren sowohl auf der Angebots- als auch der Nachfrageseite beeinflusst. Unsere Analyse basiert auf einem quantitativen Modell des globalen Treibhausgasmarktes. Wir ermitteln die in den Industrieländern erforderlichen Emissionsverringerungen, den Anteil der Kyoto-Mechanismen, den CER-Preis und die geographische Verteilung von CDM-Projekten generell sowie von Senkenprojekten im besonderen. Ein Szenario mit niedriger Nachfrage und niedrigen Preisen sowie intensivem Wettbewerb der Entwicklungsländer um CDM-Investoren erscheint wahrscheinlich. Mittels Sensitivitätsanalysen analysieren wir die Auswirkungen von Veränderungen auf der Angebotsseite (Transaktionskosten und unterschiedliche Regeln für die Bestimmung von Referenzfällen und Zusätzlichkeit). Während hohe Transaktionskosten die Wettbewerbsfähigkeit des CDM stark einschränken können, sind die anderen Faktoren von untergeordneter Bedeutung. Dagegen können diverse Faktoren auf der Nachfrageseite den CDM stark reduzieren oder völlig überflüssig machen. Dabei handelt es sich um niedrigeres Emissionswachstum im business-as-usual-Fall, höheres Angebot an ?heißer Luft? und Speicherung in landwirtschaftlichen Böden. Falls jedoch die USA teilnehmen, würde keiner dieser Faktoren den CDM ernsthaft bedrohen. Wir kommen zum Ergebnis, dass trotz der starken Einschränkung des CDM durch das Bonner Abkommen und das Fernbleiben der USA eine relevante Menge an CDMProjekten in Entwicklungsländern zustandekommt. Viel hängt von den Regeln für die Umsetzung des CDM ab. Die beste Strategie ist die Vorbereitung auf einen Markt mit niedriger Nachfrage und niedrigen Preisen. Gleichzeitig muss versucht werden, die USA zur Teilnahme am Kyoto-Protokoll zu bewegen.

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 145.

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Date of creation: 2001
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Handle: RePEc:zbw:hwwadp:26160

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  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. Zhang, ZhongXiang, 2000. "Can China afford to commit itself an emissions cap? An economic and political analysis," Energy Economics, Elsevier, Elsevier, vol. 22(6), pages 587-614, December.
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Cited by:
  1. Axel Michaelowa & Richard Tol, 2002. "Outlook for the International Climate Policy Regime– Revolution or Reform?," International Environmental Agreements: Politics, Law and Economics, Springer, Springer, vol. 2(3), pages 217-219, September.
  2. Olschewski, Roland & Benítez, Pablo C. & de Koning, G.H.J. & Schlichter, Tomás, 2005. "How attractive are forest carbon sinks? Economic insights into supply and demand of Certified Emission Reductions," Journal of Forest Economics, Elsevier, Elsevier, vol. 11(2), pages 77-94, September.
  3. Chen, Wenying, 2003. "Carbon quota price and CDM potentials after Marrakesh," Energy Policy, Elsevier, Elsevier, vol. 31(8), pages 709-719, June.
  4. Kemfert, Claudia & Zhang, ZhongXiang, 2003. "Linking developing country's cooperation on climate control with industrialized country's R&D and technology transfer," MPRA Paper 41473, University Library of Munich, Germany.
  5. Stronzik, Marcus & Hunt, Alistair & Eckermann, Frauke & Taylor, Tim, 2003. "The Role of Transaction Costs and Risk Premia in the Determination of Climate Change Policy Responses," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 03-59, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Kovacevic, Vujadin & Wesseler, Justus, 2010. "Cost-effectiveness analysis of algae energy production in the EU," Energy Policy, Elsevier, Elsevier, vol. 38(10), pages 5749-5757, October.
  7. Tassone, Valentina C. & Wesseler, Justus & Nesci, Francesco S., 2004. "Diverging incentives for afforestation from carbon sequestration: an economic analysis of the EU afforestation program in the south of Italy," Forest Policy and Economics, Elsevier, Elsevier, vol. 6(6), pages 567-578, October.
  8. James Roshetko & Rodel Lasco & Marian Angeles, 2007. "Smallholder Agroforestry Systems For Carbon Storage," Mitigation and Adaptation Strategies for Global Change, Springer, Springer, vol. 12(2), pages 219-242, February.
  9. Paul-marie Boulanger & Thierry Bréchet & Benoit Lussis, 2005. "Le Mécanisme pour un Développement Propre tiendra-t-il ses promesses ?," Reflets et perspectives de la vie économique, De Boeck Université, De Boeck Université, vol. 0(3), pages 5-27.

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