The Costs and Benefits of Integrating Non-Annex I Countries in International Greenhouse Gas Emission Trading Systems

One of the main mechanisms for implementing international Climate Change policies is the establishment of a carbon offset market that allows the transfer of emission reductions between countries. The rationale for this policy instrument, which is recognised in the Kyoto Protocol, is to facilitate global cost efficiency in climate change mitigation through a cost efficient allocation of reduction policies across regions. The current paper outlines a number of specific policy issues involved in establishing carbon offset markets with the participation of developing countries (DC’s). Future carbon emissions from the energy sector in different regions of the world are projected in order to assess time dependent trends in emission growth rates and regional contributions. The magnitude and specific character of future carbon reduction projects supplied by developing countries are assessed in relation to the potential demand from OECD countries given alternative reduction commitments and expected emission reduction costs. The potential benefits of establishing a global emission trading system are assessed for both the OECD countries and DC’s, given different time frames and emission reduction commitments. The analysis culminates in a discussion of potential trade-offs between the benefits generated by OECD countries through early implementation of emission reduction policies in DC’s, and the subsequent mitigation costs facing DC’s in the case where they enter into international emission reduction commitments at a later point in time. Framing future carbon offset markets Climate change is a long-term global environmental problem and control policies should therefore address the expected future development of emissions from different regions and sources. Control policies with modest emission reduction commitments, such as those negotiated in Kyoto, are valuable if they support the continuing evolution of more far-reaching globally cost-efficient policies. In this context global cost-effectiveness should be understood as a broad range of policies that aim to equalise marginal reduction costs across countries, sectors and emission sources and sinks. Global greenhouse gas (GHG) emission reduction policies should also be costeffective over time, implying that the policies should consider the time-specific availability of reduction options and expected technological developments connected to research and development programmes Future emission reduction costs and requirements are very uncertain. The timing of emission reduction also has a major impact on costs through the interdependence of