Abstract
One of the ways to induce compliance is for an international enforcement mechanism to authorize the use of punitive consequences against a non-compliant country. However, such consequences should not cause significant damage to other (compliant) countries. The compliance mechanism of the Kyoto Protocol fails to meet this requirement. The Enforcement Branch of the Compliance Committee is instructed to impose punitive consequences on a non-compliant country that will have considerable adverse welfare effects for compliant countries as well. Using a numerical model, we show that in the case of Norway, the welfare effects can actually be worse if another country is punished than if Norway itself is punished.
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Notes
For example, in 2003 Norwegian emissions were 8% higher than in 1990, while Norway’s Kyoto target allows emissions to be only 1 percent higher than in 1990.
The flexibility mechanisms are (i) emissions trading, (ii) joint implementation and (iii) the clean development mechanism.
At the earliest, such an amendment can be adopted at COP/MOP 3 in 2007 (see UNFCCC, 2005).
That a punishment imposes adverse effects on third parties is far from unique for the climate regime. A number of generally accepted punishment mechanisms entail adverse effects for third parties (such as the families of persons incarcerated). In fact, it might well be impossible to design punitive consequences that have no adverse effects at all for third parties. However, it is reasonable to require that the adverse effects for compliant countries are a small as possible. And it is certainly a problem if a country suffers more when another country is punished than when it is punished itself.
Because of the 30% penalty, the global emission ceiling is always reduced when a country is punished. If the punished country is a seller of permits, there will also be fewer permits available in the market.
Note that if the domestic price would have been higher than the international price, the country is free to and also would choose to purchase permits on the international market.
This assumes that OPEC does not maintain oil prices by restraining production, in which case the OPEC countries would bear the greater share of the welfare losses, and the losses of other oil exporting countries would be reduced. See Berg, Kverndokk, and Rosendahl (1997) for a discussion of these effects.
The cost of meeting emission targets will increase irrespective of whether the country buys emission permits at the increased price, or increases domestic abatement efforts.
While the overall demand for permits might decrease, this is not enough to offset the effect of a higher permit price, and the result is increased revenue from permit sales.
If a country with excess emission permits is punished, the domestic permit price might even fall to zero.
Note that while we are interested in the effects of punishment to individual countries, the model requires some aggregation of countries into larger regions. Sometimes we will therefore deal with regions, such as “Rest of Annex B”, rather than individual countries.
We could have chosen to model a situation where countries exceed their allowance by an equal number of tonnes of CO2. This would, however, not be a very interesting situation as the change in the permit price, and all second order effects, would then be the same for all scenarios where permit buying countries are punished.
The reader might object that if a region has incentives to be non-compliant in the first commitment period, then why do we assume that it will comply when it is being punished for this non-compliance? We get around this problem if we assume for example that firms/industries are responsible for the non-compliance through underreporting of emissions, and that the government does not have a sufficiently good monitoring system to detect this in the first period. When this non-compliance is discovered, the monitoring system is improved, and the firms are not able to underreport their actual emissions in the second commitment period.
This explains, to some extent, why the estimated welfare changes are relatively modest. If all changes could be attributed entirely to the final period, which is when the punishment takes place, the welfare changes for that period alone would be roughly five times greater than the numbers for the whole model horizon (with a zero change for all other periods).
Eastern European countries are expected to be permit sellers. In the model these countries are, however, part of the Rest of Annex B—which has a net demand for permits.
Except in some cases where welfare effects are negligible (i.e. no changes observed in the six decimal points that the model can display).
The DEEP model allows for intertemporal substitution. A change in permit prices in one period will therefore not result in economic adjustments in that period alone, but some adjustments will take place also in the other periods of the model. It is therefore not strictly correct to attribute all losses to one period alone.
Table 4 shows that if Russian permit exports are taken off the market, the emission cap for the other Annex І countries in effect becomes 14% more stringent. This explains why the demand for crude oil should decrease by a large percentage.
Results for all other countries are available upon request from the authors.
See UNFCCC (2005).
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Acknowledgements
We are indebted to Scott Barrett, Gunnar Eskeland, Cathrine Hagem, Fred Menz, Tora Skodvin and two anonymous reviewers for helpful comments.
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Appendix: The DEEP model
Appendix: The DEEP model
The DEEP model consists of five main elements: Production sectors, emissions trading, an Armington aggregation of domestic and imported goods, a capital and an investment sector, and a representative agent.
The structure of production and demand has been adopted from the GTAP-EG model by Rutherford and Paltsev (2000)—with some modifications. Production is described using two different production functions, one for fossil fuel production, and one for non-fossil fuel production.
Fossil fuel production is a CES-function that includes crude oil, gas and coal. Fossil fuels are produced as an aggregate of a resource and a non-resource input. Non-fossil fuel goods are produced with fixed-coefficient (Leontief) inputs of intermediate non-energy goods and an energy-primary factor composite.
Emissions trading is assumed to be comprehensive (i.e. all sectors take part in emissions trading) and fully competitive. Emissions are modelled as a fixed share input of permits in both production and final demand (more technically it is implemented as a Leontief technology composite of fossil fuel inputs and permits).
The regions are linked though bilateral trade flows. All goods, except the primary factors (labour and capital) and the investment good, can be traded among the regions. The model assumes that goods produced in different countries are not identical (the ‘Armington assumption’). The importing of goods takes place in a separate ‘Armington’ sector. The elasticity of substitution between domestic and imported goods is 4, while the, while the elasticity of substitution among imports from different regions is 8. Each bilateral trade flow requires its own transportation service (with the exception of emission permits). This is modelled as a Leontief technology between the imported good and the transportation good. The transportation margins are proportional to quantities traded.
The representative agent, which is both consumer and government, demands only the consumption good. This good is a constant elasticity aggregate of non-energy goods and energy goods. To pay for this good, the agent is endowed with labour and capital. The labour endowment grows for each year—at the same rate as the growth parameter, while capital is given as an initial capital stock. The representative agent collects all taxes and tariffs specified in the model. The agent is also endowed with emission permits—if the region is assumed to be taking part in a climate agreement. The agent uses the tax revenue and income from endowments to purchase the consumption good—or pay for investment. While the agent gets utility only from the consumption good, investment is driven by the returns to capital generated in the next period, and a terminal capital constraint.
The structures of the capital and investment sectors are straightforward. The capital sector converts the initial capital stock into returns to capital, and next-period capital stock. The return to capital is determined by the interest rate, while the next-period capital stock is equal to the initial capital stock less depreciation. Investment takes place through the production of an investment good (with the same production structure as other non-fossil fuel goods). The output from the investment is next-period capital stock.
The model is an intertemporal model with a utility maximising representative agent. Investment (growth) is endogenous, but investment is not determined, as in many other models, through a time preference rate or savings rate. Instead the time preference rate is implied through an equilibrium growth parameter that defines a growth rate that is optimal for the original equilibrium (baseline). Investment (and thus growth) will vary between the scenarios as the representative agent seeks to maximise utility under the new conditions (the intertemporal elasticity of substitution is 0.5). The equilibrium growth parameter is differentiated between regions and time periods.
The economic data used in the DEEP model is the GTAP (v5) data base—which provides input-output data for each region, bilateral trade data, and information on taxes and tariffs. These taxes and tariffs are used in the DEEP model. The emissions data is from the GTAP/EPA Project “Towards an Integrated Data Base for Assessing the Potential for Greenhouse Gas Mitigation”. The growth and technological change parameters in the model are based on the IPCC SRES A1B scenario (Nakicenovic and Swart, 2000). The SRES A1B scenario assumes “rapid and successful economic development”, where the global economy grows at an average annual rate of 3%, and where technological progress is rapid.
Further details of the model can be found in Kallbekken (2004).
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Kallbekken, S., Hovi, J. The price of non-compliance with the Kyoto Protocol: The remarkable case of Norway. Int Environ Agreements 7, 1–15 (2007). https://doi.org/10.1007/s10784-006-9025-z
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DOI: https://doi.org/10.1007/s10784-006-9025-z