Jon Hovi

The first commitment period of the Kyoto Protocol expires in 2012. Many observers expect that a new agreement, designed for the second commitment period, will then have seen the light of day. To what extent are the conclusions reached in this book likely to be valid for this new agreement? Needless to say, it is hazardous to speculate on events that lie almost a decade ahead. Still, a few comments on the subject are appropriate.

Two main scenarios may be envisioned. The first is that the Kyoto Protocol enters into force and works fairly well, and that current non-parties (notably the US) join in before 2012. Clearly, this is a goal that the parties to the Kyoto Protocol have set for themselves. It should be emphasized, however, that including more parties will not necessarily make the agreement more effective. As pointed out by Barrett (1999; 2002; 2003), one may have to choose between a treaty that is 'broad but shallow' and one that is 'narrow but deep'. In other words, broadening the set of Member States may be possible only by making the agreement less ambitious (e.g., in terms of targets for emissions reductions). Nevertheless, should this first scenario materialize, it is reasonable to expect the agreement for the next commitment period to share many of the characteristics of the Kyoto Protocol. In particular, the basic Kyoto strategy, with a strong focus on quantitative emissions permits and flexibility mechanisms, may be expected to survive beyond 2012. Moreover, the compliance system of the new agreement may be expected to follow the same lines as the one provided by the Marrakesh Accords. If this scenario materializes, therefore, we would largely expect the argument of this book to be valid for the next climate agreement as well.

The second main scenario is that before the end of 2012, the parties reject the Kyoto strategy and turn to some alternative way of mitigating climate change. This might happen if major weaknesses of the Kyoto strategy are revealed during the first commitment period, or if the US continues to object to the Kyoto model, while signalling a more sympathetic attitude to some other basic design for an international climate regime.

At least four major alternatives to the Kyoto system have been discussed in the literature (Müller et al, 2001; Lisowski, 2002).1 The first is to use intensity targets that focus on greenhouse gas (GHG emissions) per unit of GDP, so that emissions are allowed to increase with economic growth. The proponents of this option argue that, because of the strong link between emissions and growth, intensity is a better measure of performance than the absolute level of emissions. Intensity targets are also likely to be an attractive model for developing countries, as this approach makes it feasible to improve climate performance even in the midst of a rapid economic transition. It has been proposed to link intensity targets to so-called 'best practice' levels. This means that the intensity target of a given country A would equal the intensity level of the party with the best climate practice (i.e., the lowest intensity level) of all parties comparable to A in terms of development. This system has the attractive property that emissions per capita tend to converge to best practice levels at all stages of development. Any remaining differences would thus be due to economic structure (Lisowski, 2002).

A second alternative is to use a technology-focused approach. Proponents of this alternative typically argue that constraints on emissions should be deferred, or even abandoned altogether, in favour of an approach focusing on technological development and technological standards. An underlying motivation is that climate change is a long-term problem, and that costs may be cut considerably by postponing restrictions on emissions until better technology becomes available. New technology could be imposed through mandatory requirements, such as a requirement that new fossil power plants installed after, say, 2020 must remove all carbon from their exhaust stream and use new synthetic fuels to capture and dispose of carbon released in the conversion process (Edmonds and Wise, 1999). In this way, new technology would be introduced gradually as old plants become due for replacement. This is likely to cut costs considerably. Also, technological innovation might improve fuel efficiency and help develop alternatives to carbon-emitting technologies. As in the case of intensity targets, a technology-based approach might help to motivate developing countries to participate, especially if participation is linked to transfers of new technology.

A third option is price caps allowing governments to allocate emissions permits to domestic industry beyond the original allowances if emissions trading drives the price of permits above a pre-determined level (a 'trigger price'). In effect, producers have the choice of either obtaining a permit in the market or buying a permit from the government at the pre-determined trigger price (Pizer, 2002). In this way, the market price is prevented from climbing above the trigger, meaning that a maximum price per unit of emissions is established. This ensures that the maximum cost of meeting a commitment is known in advance, both at the country level and for producers at the subnational level. Price caps might thus satisfy Washington's concern that costs under the Kyoto system could turn out to be unacceptably high.

Finally, coordinated taxes represent a fourth approach: imposing an additional cost on emissions of GHGs to provide an incentive to cut emissions beyond the level that would otherwise have been reached. Taxes promote economic efficiency by ensuring that the resulting emissions level is achieved at the lowest possible cost.2 This requires, however, that taxes are coordinated internationally, so that emitters face the same tax everywhere (Cooper, 1998). Like price caps, a tax also makes the costs of reducing emissions more predictable than they are likely to be under a regime based on fixed emissions levels.

Clearly, the challenges for compliance generated by these alternative approaches differ significantly from those raised by the Kyoto Protocol. There are at least two reasons for this. First, the overall level of non-compliance could well be lower if an agreement for the second commitment period is based on one of the above approaches. Compared to the Kyoto regime, several of the above alternatives share the advantage that the costs of reducing emissions are likely to be more predictable. Predictability curbs non-compliance by reducing the risk that signatories accept commitments that they are in fact unwilling - or even unable - to fulfil.

Second, the difficulties connected to verification and enforcement are likely to differ from those encountered by the Kyoto strategy. On the one hand, some alternative approaches might prove at least as difficult to enforce. For example, this could be the case for a regime based on intensity targets. As in the Kyoto Protocol, a basic element would be a set of emissions targets. However, allowing such targets to depend on economic output implies additional challenges. One such challenge is that intensity growth rates are sensitive to the choice of economic output measure, and to economic upturns and downturns. This could potentially trigger disputes over whether or not a given country's target has actually been reached, and whether sufficient good faith efforts have been made to achieve the target. Moreover, to assess compliance it may be necessary to verify the underlying economic indicators themselves.

Other options might turn out to be easier to enforce than the Kyoto strategy. For example, this seems like a plausible hypothesis for a technology-based approach, which might enhance compliance through network externalities and technological lock-in (Aldy et al, 2003). Such an approach would also make it relatively easy to verify that each party has fulfilled its obligations (Barrett, 2003). It is easier to establish the nature of new power plants, or the emissions of new cars, than it is to measure a given country's total emissions of GHGs.

The literature on alternatives to the Kyoto strategy has so far been more concerned with economic efficiency than with compliance. Hence, the brief comments above should be seen as indicative at best. While this book has focused on conditions for compliance with the Kyoto Protocol, the corresponding conditions for compliance with other models for a climate regime largely remain a challenge for future research.

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