Caps and Fences in Climate Change Policies, Trade-offs in shaping post-Kyoto

Tradeoffs between abatement costs and abatement efforts are analyzed and discussed. We show that the abatement costs in of a global coalition and unrestricted trade are relatively modest. These costs will rise considerably with a shrinking coalition size. If the coalition size shrinks, the migration of energy-intensive activities to non-participating countries tends to increase. CDM may lower abatement costs in incomplete coalitions. 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, the compliance costs for countries will be quite different.

The Kyoto Protocol represents an initial, small step towards mitigating global warming. Much larger greenhouse gas (GHG) emission reductions will be necessary in the post-Kyoto-era to stabilize atmospheric GHG-concentration levels at a 'safe' level. The more ambitious reduction targets that need to be set and the desirability of getting more countries involved makes the establishment of follow-up commitments beyond 2012 a challenging task. Our paper can be viewed as a sequel to a report (Bollen, Manders, Veenendaal, 2004) documenting the assessment of impacts of a policy scenario in which industrialized countries in 2020 accept emission targets that are 30% below 1990 emission levels. Our aim in this paper is to provide an analysis of additional scenarios over and above this case. In this way, policy makers will be provided with a broader spectrum of alternative post-Kyoto policy scenarios and their implications. 

The analyses of the macro-economic consequences of post-Kyoto policies in 2020 reveal the costs of climate policy to be largely determined by three factors: the reduction target, the economic development in the underlying scenario without new climate policies, and the design of policy. The studied policy options in the report are coalitions with (much) less than global coverage, restrictions on emissions trading, full versus limited use of the Clean Development Mechanism (CDM) and, finally, less ambitious aims, achieved by raising caps or imposing fixed (relatively small) carbon taxes. Alternative tradeoffs between abatement costs and abatement efforts are established and discussed in this context. We show the abatement costs in the benchmark case of a global coalition and unrestricted trade to be relatively modest and conclude that these costs could rise considerably with smaller coalitions. A smaller coalition will induce migration of energy-intensive activities to non-participating countries. CDM may lower abatement costs in incomplete coalitions.  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 the compliance costs for countries will be quite different.