Perspectives from Economics, Game Theory and Public Choice
New Horizons in Environmental Economics series
Edited by Christoph Böhringer, Michael Finus and Carsten Vogt
Christoph Bohringer and Andreas Loschel 1. INTRODUCTION Despite the withdrawal of the USA under President Bush in March 200 1, the Kyoto Protocol marks a milestone in climate policy history. For the first time, industrialized countries as listed in Annex B of the Protocol have agreed on quantified emissions limitations and reduction objectives. The negotiations around the Protocol have been dominated by two fundamental issues whose reconciliation is crucial for any substantial international agreement on climate protection: efficiency in terms of overall abatement costs, and equity in terms of a ‘fair’ distribution of these costs across countries. These issues are relevant in other fields of international environmental policy as well, but their importance in the greenhouse context is unique, given the potential magnitude of abatement costs at stake. With regard to efficiency, the Kyoto Protocol allows for the use of emissions trading, joint implementation (JI) or the clean development mechanism (CDM) in order to reduce total costs of abatement. However, the permissible scope and institutional design of these flexible instruments are controversial among signatory parties. Several Annex B parties, such as the EU, are concerned that the extensive use of flexible instruments will negatively affect the environmental effectiveness of the Kyoto Protocol. They stress the principle of supplementarity and call for ceilings on the amount by which national reduction targets can be achieved through the use of flexible instruments foreseen by the Kyoto Protocol (Baron et al. 1999). Other Annex B parties, such as the USA, have been strongly opposed...
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