Dynamic consistency problems behind the Kyoto Protocol

This paper examines the economic rationale behind both the quantitative targets and the flexibility mechanisms adopted in the Kyoto Protocol. It synthesizes some theoretical dimensions of the debate about the so-called 'when flexibility' of climate policies, explaining the importance of the interplay between uncertainty and techno-economic inertia. Numerical results show that the aggregate Kyoto abatement target is consistent with a stochastic dynamic optimum in which a 450 ppm concentration ceiling is seriously considered. Turning to the EU-US debate about the interpretation of the 'supplemental to' condition in Article 3 of the Kyoto Protocol regarding the articulation between international trading systems and domestic policies and measures, this paper illuminates the risk of dynamic inconsistencies due to the heterogeneity of capital stocks in the economy, if price signals do not emerge in due time from greenhouse gas trading systems because of the 'hot air' in some countries and the discovery of low cost abatement potentials in Annex B countries. Numerical simulations show that a delay of action on sectors with large inertia of capital stocks may, under such circumstances. undermine the economic viability of climate policies beyond 2012. Some lessons are derived from the future of climate policies and negotiations about the implementation of the Kyoto Protocol.