Academic journal article Contemporary Economic Policy

Does the Kyoto Protocol Cost Too Much and Create Unbreakable Barriers for Economic Growth?

Academic journal article Contemporary Economic Policy

Does the Kyoto Protocol Cost Too Much and Create Unbreakable Barriers for Economic Growth?

Article excerpt

I. INTRODUCTION

Climate change policy is rightly seen as a major component of environmental policy, but its increasingly pertinent role in the wider context of economic policy is often overlooked. The debate on climate change policy, particularly with respect to the Kyoto Protocol, was heavily focused on the economic costs and feasibility of the proposed greenhouse gas (GHG) mitigation plans. In an attempt to assuage fears of overwhelming costs, the Kyoto Protocol was introduced with several mechanisms, which were designed to help lower the costs of implementation (See UNFCCC, 1997). Despite continued concerns about the potential high costs of implementation--from politicians, economists, and industry alike--the Protocol was ratified by, among others, the European Union (EU), Japan, Canada, Russia, and Ukraine, and it came into force in February 2005. The Bush Administration opted against ratification and has proceeded on its own path, spurred in large part by concerns about the purported high economic costs of implementing the Protocol.

The Protocol, though, is but the first step in addressing the issue of climate change from a policy perspective. The debate on the costs of GHG mitigation continues apace as discussions begin for the period after Kyoto. In this post-Kyoto debate, the economic costs of mitigation will play an equal if not larger role, for many parties, than the discussion about the actual environmental effects of climate change.

As the Kyoto Protocol is the only extant large-scale climate protection program, it is a natural laboratory to determine what the costs of climate protection will be. Future agreements will have to cover longer periods of time, include more countries, and may involve significantly deeper reductions in emissions. We use the former debate over the projected costs of the Kyoto Protocol to provide an historical context that informs the ongoing debate about the next steps internationally.

There are real costs that will be incurred for mitigating GHGs, but this debate also reveals the shortcomings of many economic estimates of these costs, which do not include the substantial ancillary environmental benefits associated with the mitigation measures. More than merely an environmental policy, the issue of climate change is important for policy makers in general and specifically for economic policy makers.

Furthermore, this debate pays little attention to the question how certain are we about the costs of environmental regulation, particularly with regard to the Kyoto Protocol? What evidence do we have that environmental regulations must be costly by necessity? Certainly, there are many studies that attempt to measure these costs. Traditionally, they have been divided into the "top-down" studies, which model the whole economy as an interdependent structure and look at the reduction in Gross Domestic Product (GDP) relative to a no-GHG constraint policy, and "bottom-up" models, which identify the measures needed to achieve a given target reduction at the sectoral level. (1) Typically, bottom-up estimates have estimated the costs at the national level of a 20% reduction of GHG emissions relative to the 1990 levels to range from being negligible to being slightly negative--that is, imposing the constraint actually lowers the cost to society of meeting the targets (IPCC, 2001). We discuss this somewhat surprising finding later. With top-down models, however, the costs of GHG reduction are estimated to be as high as 4%-5% of GDP. (2) Due to the aggregated approach of top-down models, the side effects from changes in regulatory regimes (in this case the ancillary effects from the regulation of climate change) cannot be taken into account. Some studies have found that policies to limit the emission of GHGs result in lower levels of emissions of particulate matter up to 10 micrometers in size, and this reduction of conventional pollution has immediate, positive human health and social benefits (see, e. …

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