The Economics of a Lost Deal

This paper examines compromise spaces between competing perspectives on four key climate change issues: costs, level of domestic action, environmental integrity, and developing world involvement. It focuses on the policy issues stemming from the uncertainty about abatement costs. Based on extensive simulations of a model integration tool, SAP12 (Stochastic Assessment of Climate Policies, 12 models), the analysis considers options for fine-tuning the Kyoto Protocol, such as concrete ceilings or levies on carbon imports; restoration payments to be made on excess emissions; credits for sequestration activities in Annex B countries. It demonstrates that the restoration payment (also known as a safety valve) emerges as a superior means of addressing the cost uncertainty issue, and, on pure economic considerations, provided a large compromise space at COP6 for payments of $35 to $100 per ton of carbon. Examining the Marrakech accord, it derives some lessons for attempts at completing Kyoto's unfinished business or at moving on to a new framework.