The Economics of the Kyoto Protocol

This paper gives an overview of the economics of the Kyoto Protocol, the agreement that was adopted unanimously by government negotiators in December 1997 to tackle the threat of climate change. The Protocol was adopted against a background of hugely disparate perspectives concerning the urgency of action, the costs of limitations, and the appropriate instruments. In the end, the view of the US administration prevailed that binding emission commitments for industrialised countries should be complemented by the use of a number of ‘economic instruments’ adopted for the first time at the international level. From a purely economic standpoint, the aim of the resulting agreement is to tackle the threat of climate change by establishing an efficient regulatory framework that sets an international ‘price’ on emissions of CO2 and other greenhouse gases, initially focused upon industrialized countries with mechanisms for offsetting against projects in developing countries. The core mechanism for achieving this is quantified emission commitments (established for industrialised countries in Kyoto’s first commitment period of 2008–12), which are given market-based flexibility through the use of emissions trading and other international economic instruments, and with negotiations on subsequent period commitments mandated to follow. The paper analyses the economics of Kyoto in two main parts. The first part explores the basic structure of the Protocol, illustrated with respect to some of the key debates that went into its formation. The second part then examines the practical economic consequences of the final agreement