Efficiency and Equity of Emissions Trading with Endogenous Environmental Technical Change

Abstract

In recent years, particularly the last one, there have been many attempts to quantify the costs of implementing the Kyoto agreement under different policy options, i.e. with or without different degrees of introduction of the so-called ‘flexibility mechanisms’ (Emissions Trading, Joint Implementation, Clean Development Mechanisms).¹ Despite the high variability, all estimates show that the Kyoto flexibility mechanisms significantly reduce the costs of compliance. Shogren (1999) notes that ‘it is estimated that any agreement without the cost flexibility provided by trading will at least double the US costs, ... the key is to distribute emissions internationally so as to minimise the costs of climate policy’. Manne and Richels (1999) state that ‘losses in 2010 are two and one-half times higher with the constraint on the purchase of carbon emissions rights; international co-operation through trade is essential if we are to reduce mitigation costs’. These are just two examples of the many studies reaching the same conclusion: emissions trading, and more generally flexibility mechanisms, can achieve a reduction in overall mitigation costs without reducing the effectiveness of the climate policy (see also Rose and Stevens, 1999; Bosello and Roson, 1999; Hourcade, Ha-Duong, and Lecocq, 1999; Tol, 1999). The same conclusion can also be achieved independently of the specific climate model adopted.