How sanctioning a noncomplying party can have economic consequences for enforcing countries

The previous section showed how sanctions could affect prices of quotas, fossil fuels and emission-intensive goods. Because countries in the Enforcement Branch (referred to here as 'enforcing countries') also participate in the global economy, these impacts could affect their costs and benefits of continued participation in the agreement. More importantly, these impacts could influence their decisions. The extent to which suspending a non-complying country's eligibility to sell quotas and imposing a penalty on its excess emissions will have consequences for an enforcing country depends on whether the enforcing country:

1 is a seller of quotas/Clean Development Mechanism (CDM) credits or a buyer of quotas;

2 has a large emission-intensive industry/is a significant importer of emissionintensive goods; and

3 is a fossil-fuel importer or exporter.

First, changes in the international price of tradeable quotas would influence the expected costs and benefits of an enforcing country differently depending on whether that country is a seller or a buyer of tradeable quotas. If the international quota price increases as a result of imposing sanctions on a non-complying country, this would be an advantage for a selling country but a disadvantage for a buying country, and vice versa if the international quota price decreases. Whether a country ends up as a buyer or seller of quotas in the international market depends, as discussed above, on the abatement costs of that country and its emission-reduction commitments under the Kyoto Protocol.

Developing countries will be affected by changes in the quota prices because they may participate indirectly in the tradeable quota markets by selling CDM credits. The tradeable quota market and the market for CDM credits will be linked by the international quota price. The price of a tradeable quota and a CDM credit will probably be nearly equal (including transaction costs).16 Large sellers of CDM credits will benefit from an increase in the prices of quotas. China and India emerge as major CDM suppliers according to both the Zhang (2000) study and a study by Austin and Faeth (2000). According to Zhang, China and India will account for, respectively, 60 per cent and 16 per cent of the total CDM flows. In the Austin and Faeth study, China's share of the CDM flow ranges from 57 to 70 per cent, while India accounts for 7 to 11 per cent.

Second, if the prices of different emission-intensive goods are changed, this will affect the costs and benefits of enforcing countries depending on their magnitude of import and export of these goods. A large exporter of specific emission-intensive goods would benefit from a price increase, whereas the opposite would be the case for a large importer of the same type of goods. An enforcing country that imports and exports a small amount of those goods would not be significantly affected by the price changes.

Finally, the same would be the case for a large exporter or importer of different fossil fuels and for a large producer or importer of different emission-intensive goods. Consider Tables 5.2 and 5.3 in Appendix A: such large oil exporters (relative to GDP) as the Middle East countries, Venezuela, Norway (in the category 'rest of EFTA') and the whole category 'rest of the sub-Saharan African countries' would benefit from an increase in the price of oil. Large oil importers (relative to GDP), such as Korea, the Philippines, Thailand, and Central America and the Caribbean would experience an increase in costs from an increase in the price of oil.

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