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Costs and results of the implementation of the Kyoto Mechanisms

Kosten en gevolgen bij de toepassing van de Kyoto Mechanismen

Synopsis

Unrestricted use of the Kyoto Mechanisms yields substantial cost savings on the implementation of the Kyoto Protocol. Annex-I emission trading can cut compliance costs by more than a third while global trading can further reduce costs to a fraction of the amount without emission trading. In absolute terms, emission trading may reduce compliance costs up to $300 billion and bring down the permit price below $5 t/CO2. Restricting the use of the Kyoto Mechanisms, such as ceiling on the sales or purchases of emission permits wipes out a substantial part of these cost savings. A ceiling on permits sales has probably a larger impact on emission trading than limiting purchases; mainly the buyers suffer since they have to pay more for emission permits as well as take more expensive domestic measures to reduce emissions. The EU-proposal for a ceiling on both permit sales and purchases favours the USA but harms the EU, a result opposite the negotiating positions of both parties on this subject. Market power and market segmentation also imply limiting the flexibility of emission trading and hence increase compliance costs. The Kyoto Mechanisms have a strong but varying impact on carbon leakage. Without emission trading, carbon leakage is about 10-20% but since Annex-I trading lowers the permit price, the impact on energy prices is lower and hence carbon leakage is only 3-7%. CDM on the other hand increases carbon leakage to 30-40%.
 

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