Economic Analyses of the Kyoto Protocol Is There Life after Kyoto

william d. nordhaus

This paper reviews different approaches to the political and economic control of global public goods like global warming. It compares quantity-oriented control mechanisms like the Kyoto Protocol with price-type control mechanisms such as internationally harmonized carbon taxes. The pros and cons of the two approaches are compared, focusing on such issues as performance under conditions of uncertainty, the volatility of induced carbon prices, the excess burden of taxation and regulation, accounting finagling, corruption, and implementation. Although virtually all policies involving economic global public goods rely on quantitative approaches, price-type approaches are likely to be more effective and more efficient.

After more than a decade of negotiations and planning under the United Nations Framework Convention on Climate Change (UNFCCC), the first binding international agreement to control the emissions of greenhouse gases has come into effect in the Kyoto Protocol. The first budget period of 2008-12 is at hand. Moreover, the scientific evidence on greenhouse warming strengthens steadily as observational evidence of warming accumulates. The institutional framework of the protocol has taken hold solidly in the European Union's Emissions Trading Scheme (ETS), which covers almost half of Europe's CO2 emissions.

Notwithstanding this apparent success, the Kyoto Protocol is widely seen as somewhere between troubled and terminal. Early troubles came with the failure

Figure 6-1. Fraction of World Emissions Covered by the Kyoto Protocol

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