The Kyoto Protocol and Developing Countries

Under the Kyoto Protocol, the world’s wealthier countries assumed binding commitments to reduce greenhouse gas emissions. The agreement requires these countries to consider ways to minimize adverse effects on developing countries of these actions, transmitted through trade. Using a general equilibrium model of the world economy, we find that adverse effects fall mainly on energy-exporting countries, for some even greater than on countries that are assuming commitments. Removing existing fuel taxes and subsidies and using international permit trading would greatly reduce the adverse impacts and also reduce economic impacts on the countries taking on commitments. Another approach, preferential tariff reduction for developing countries, would benefit many developing countries, but would not target those most adversely affected. If instead, OECD countries directly compensated developing countries for losses, the required annual financial transfer would be on the order of $25 billion (1995 $US) in 2010.