Marginal abatement costs of CO2 emission reductions, geographical flexibility and concrete ceilings:: an assessment using the POLES model

The Kyoto Protocol envisage the setting-up of flexibility mechanisms allowing Annex B countries to fulfil their commitments to reducing greenhouse gases with respect for the principle of economic efficiency. The current negotiations relate in particular to the possibility of setting up a system of tradable emissions permits for Annex B countries and also of introducing "ceilings" to trade. This paper analyses the stakes and economic potential of adopting this instrument, both for those countries that made commitments in Kyoto and for developing countries. It is based on a formal approach that allows for a consistent framework of analysis. The emission permit market, is, in fact, simulated on the basis of a reference scenario and of marginal abatement cost curves and estimated by the POLES model; after analysing these marginal abatement cost curves and comparing them with those produced by other models, we explore two different configurations for a competitive market: a market limited to the Annex B countries and a world market. The results produced by the model show that widening the market to include developing countries is more effective than the Annex B market solution; it reduces the cost of implementing Kyoto for OECD countries and at the same time allows the countries of the South to benefit from selling the permits. This research also shows that introducing restrictions on exchanges for Annex B countries could have a counter-productive redistribution effect, with the ethical argument that underlies that particular measure. (C) 1999 Elsevier Science Ltd. All rights reserved.