- Email: [email protected]
“Economic” and “Political” cooperation in various climate policy scenarios
Climate Policy 3 (2003) 171–177
Viewpoint
“Economic” and “Political” cooperation in various climate policy scenarios Bertrand Hamaide a,b,∗ a
Facultés Universitaires Saint Louis, CEREC, 43 Boulevard Botanique, 1000 Brussels, Belgium b Faculté Universitaire des Sciences Agronomiques, Gembloux, Belgium
Received 13 June 2002; received in revised form 12 September 2002; accepted 18 December 2002
Abstract Cooperation in the economic sense considers efficiency issues. Cooperation in the political sense, like the Kyoto Protocol, considers other issues like equity and historical responsibility. The environmental and economic impacts of the Kyoto Protocol and other scenarios are thus examined. The US pullout may then be viewed, among others, as the result of not untying “economic” and “political” cooperation; and since the Protocol will be much less effective without the US, it is shown that an external economic stimulus should and may theoretically be found for retaining their participation. © 2003 Elsevier Science Ltd. All rights reserved. Keywords: Climate policies; Cooperation; Efficiency; Equity; US participation
1. Introduction The economic analysis and the resulting environmental impact of worldwide cooperation versus a non-cooperative behavior are very well documented.1 Since the early discussions about emissions reduction at the Earth summit in 1992, some countries showed a willingness to curtail emissions while others did not; hence, partial cooperative scenarios, and their impacts on regional and global abatement as well as welfare, can also be examined from a purely economic perspective. This is done in Section 2. The other part of the paper departs from the pure economic analysis to evaluate the impacts of various political scenarios, incorporating equity and historical responsibility ideas, among which uniform emission reductions and the Kyoto Protocol with and without the participation of the United States. General conclusions are then derived in the final section. ∗
Tel.: +32-2-211-7811; fax: +32-2-211-7997. E-mail address: [email protected] (B. Hamaide). 1 See for example Cline, 1992; Nordhaus, 1994; Nordhaus and Yang, 1996; Chander et al., 1999. 1469-3062/03/$ – see front matter © 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S1469-3062(03)00031-7
172
B. Hamaide / Climate Policy 3 (2003) 171–177
Table 1 Regional net benefits (Wj ) in billion USD for a uniform 16.6% abatement compared to cooperative and non-cooperative “economic” net benefits Wj
USA OOECD FSU China ROW W
R = 16.6%
Non-cooperation
Wj cooperation
113 906 1244 735 3139 6136
354 624 1139 667 1571 4355
282 1105 1468 637 2813 6305
2. “Economic” aspects of cooperation A simple five-region static formulation of estimated variables from 1990 to 2100 is used to compute net benefits of cooperative, non-cooperative and partial cooperative policies. Obviously, hypotheses used in the cost-benefit formulation have an impact on the results, which should then be interpreted with caution.2 Economically speaking, the non-cooperative strategy implies that, by ignoring the impact of its emission policy on others, a region maximizes its own welfare (net benefit) while taking as given the behavior of the others. The other side of the coin, full cooperation, is reached when all countries act as if they are a single entity thereby internalizing the externality by maximizing their global net benefit. In between lies partial cooperation where cooperating countries maximize their global payoff and non-cooperating regions act selfishly by only considering their own net benefit. The economic outcome of the numerical analysis reveals four main points. First, as expected, abatement and global net benefits are higher at full cooperation (16.6% versus 5.8% abatement, net benefits Wj being depicted in Table 1). Second, the non-cooperative scenario is such that the United States and China free ride (do not abate anything) because their own abatement cost is larger than their own benefit. Third, developing nations bear most of the abatement burden at full cooperation3 because their marginal abatement cost is lower than in the developed world4 (and from an efficiency perspective, those with lower abatement costs should abate more than those with higher costs so as to minimize total costs). Fourth, the grand coalition and any sub-coalition involving at least one developing region can be economically viable provided that south–north transfers are accepted, that is as long as poor countries attract rich countries in the coalition by side payments (as abatement is more expensive for the latter). In conclusion, cooperation in the economic sense is purely guided by economic rationality. But truly, there are other considerations in negotiating a climate agreement. One of the most important aspect underlying the Kyoto Protocol is the recognition that the developed world has benefited from the use of 2
The full description of the model mentioned in this section as well as the hypotheses and their justification, the results and the caveats can be found in Hamaide and Boland (2000) for the cooperative and non cooperative case and Hamaide (2002) for partial cooperation. 3 Note that ROW (rest of the world) reduces emissions far more than any other region, both in non-cooperation and in cooperation. This is due to the fact that their estimated abatement cost curve is negative over the first 15% emissions reduction range; hence ROW would greatly benefit from abatement. 4 This is consistent with most numerical analyses (OECD, 1993).
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resources since much longer than developing nations and still emits more carbon dioxide; consequently, richer nations have to lead the way in reducing CO2 . Therefore, it is fair to postulate that there should not be transfers from the south to the north: even if it is economically efficient, it is not politically acceptable to disproportionately place the burden on developing nations in terms of abatement and transfer payments. Cooperation in the economic sense should be (and is being) supplemented and even overthrown by cooperation in the political sense incorporating equity and historical responsibility.
3. “Political” aspects of cooperation The purpose of this section is less the economic analysis than the pragmatic analysis. The idea is to evaluate and compare the economic impact and the resulting abatement of various policies that have been discussed over the years since the Earth Summit or that are purely hypothetical (uniform reductions, stabilization policies and Kyoto type strategies). 3.1. Uniform reductions Command-and-control policies are the most widely used tools in environmental policies and one of the most common options is the uniform reduction; this is why it is considered here. The best uniform target is obviously a policy bringing about the optimal cooperative abatement, that is 16.6% reduction as shown in Fig. 1. Resulting regional net benefits are displayed in Table 1. By imposing a uniform abatement and not a reduction based on regional cost curves, the burden is now shared evenly instead on being mostly placed on developing nations (but the feasibility of a reduction for poor countries is yet to be analyzed and accepted politically). Resulting welfare is slightly smaller than at full cooperation (6136 < 6305) but distributed to the advantage of poor nations: the three non-OECD groups (Former Soviet Union (FSU), China and the rest of the world (ROW)) are better off than at non-cooperation. The loss of USA can easily be compensated by transfer payments from the OOECD (other OECD countries) alone for the scenario to hold theoretically. And since a uniform percentage
Fig. 1. Net benefit of abatement.
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B. Hamaide / Climate Policy 3 (2003) 171–177
Table 2 Regional net benefits (Wj ) in billion USD and emissions reductions (Rj ) in percentage, for various stabilization and Kyoto policies Case 1
USA OOECD FSU China ROW W, Θ, R
Case 2
Case 3
Case 4
Case 5
Case 6
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
−4654 −5983 612 1940 3057 −5028
46.5 52.2 0 0 0 17.1
−2761 −2474 1762 −5554 −6668 −15695
46.5 52.2 0 64.5 53.3 49.4
−4033 −4838 1740 2015 5151 35
46.5 52.2 15.3 16.2 16.4 27.6
−5231 −6510 −823 2353 3716 −6495
49.8 55.3 28.2 0 0 20.8
753 −7425 −1121 1417 2229 −4147
0 55.3 28.2 0 0 12.5
−4764 −5648 1780 2139 5351 −1142
49.8 55.3 15.3 16.2 16.4 28.7
reduction is the easiest method to implement, it could have been a good alternative to the targets set out in Kyoto. During the negotiations, it has however been estimated that developed countries should do the first and largest step. For that reason, it is interesting to compare the impact of stabilizing emissions (and not concentration) in OECD as originally proposed in the Framework Convention on Climate Change in 1992 and decreasing emissions in the same countries compared to 1990 levels as proposed in the Kyoto Protocol. 3.2. The stabilization scenarios The three scenarios are as such: stabilization of OECD emissions at their 1990 levels while non-OECD emissions go “business-as-usual” (case 1), are limited by a ceiling (case 2) and are reduced by 16.6% with respect to “business-as-usual” levels as of 2010 (case 3).5 Regional net payoffs and abatement efforts are displayed in Table 2. Stabilizing emissions in OECD is costly for rich countries whereas poor countries derive benefits from abatement in the developed nations.6 Social welfare is very negative (W = −5028) for a larger global abatement than at full cooperation (17.1%). However, the environmental advantage of that policy needs to be traded off against the global economic loss it brings about. The second policy option restricts emissions of non-OECD countries below twice their 1990 levels until 2100. The former Soviet Union does not undertake any abatement as it less than doubles emissions over the period considered but China and ROW are very much restricted because of their rapidly increasing emission trend in business-as-usual conditions (65 and 53% reduction, respectively). Therefore, social welfare is even more negative than in the previous scenario where OECD acts by itself. On the environmental side, this is a seemingly favorable option since there is a global emissions cut of 49.4% but it would be done at the expense of developing countries, which is thus inapplicable in policy negotiations. If the non-OECD countries’ ceiling is replaced by the interesting uniform reduction scenario in that part of the world while OECD nations stabilize their emissions, social welfare becomes slightly positive 5 Emission restrictions in the remaining part of this paper are computed with respect to business-as-usual levels as of 2010 like established in the Kyoto Protocol. 6 Note that FSU would nevertheless have had an incentive to abate up to its non cooperative point and not to completely free ride as the cost of its first emissions restrictions is negative—but that is not taken into account here as the hypothesis is that non OECD countries go business-as-usual.
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(W = 35) and abatement reaches 27.6%. This third scenario, while being economically inefficient, has various advantages. First, OECD’s net payoffs are less negative than if they act alone. Second, the burden of abatement is placed on rich nations who historically are the largest user of the world’s resources. And third, non-OECD’s payoffs are all positive, contrary to the previous option and even higher than at cooperative and non-cooperative equilibrium. 3.3. The Kyoto scenarios Instead of stabilizing emissions in developed nations, the Kyoto Protocol went further and asked for emission reductions in the OECD and stabilization in the FSU. Three additional scenarios are considered. The fourth one is the original Kyoto Protocol, the fifth one is the Protocol without the USA and the last one is the Protocol with a uniform reduction of 16.6% in the developing world as of 2010. Resulting emission reductions and net benefits are illustrated in Table 2. The original Kyoto Protocol negotiated in 1997 is aimed at reducing emissions by an average of 5.2% (respectively 0, 7 and 7.3% for FSU, USA and OOECD7 ) in 2008–2012 in Annex I countries compared to 1990 levels while the others go business-as-usual. Compared to the stabilization scenarios, OECD countries make a larger reduction, worsening their net loss, and FSU is losing as well in stabilizing its emissions.8 Non-OECD countries, being unrestricted, get large positive net payoffs but it is not sufficient to cover the loss of the other regions and therefore, social welfare is largely negative. Economically speaking, computations show that the Kyoto Protocol is not an acceptable solution. Nonetheless, its environmental impact is fairly large (20.8% reduction, which is higher than the economically efficient cooperation of 16.6%) and developed nations face their responsibility of historical exploitation of the commons. The justification of the negotiated Protocol may therefore be a tradeoff of economic efficiency for environmental and political purposes, or a way of paying back past external costs. In 2001, the Bush administration refused to ratify the Protocol. If this can make economic sense, looking at the rough numbers exposed above, it did change the global picture and the global idea behind the Protocol. First, the Protocol was denied its apparent prime importance for environmental objectives and political cooperation rather than economic efficiency. Then, the free riding position of the USA might have induced other nations like OOECD (whose net loss increases from 6510 to 7425) and FSU to follow that lead. Because of the worldwide outrage following its decision and for the remaining Protocol not to break apart, the USA is proposing an alternative solution for itself but some large OECD countries (the umbrella group: Canada, Australia and Japan) are still hesitating about their final position on the ratification. Provided that the USA is free riding—which is their non-cooperative economic result—but that the umbrella group and the FSU are ratifying the Protocol, global curtailment is now down to 12.5% (case 5), that is about 40% less than the original expected environmental impact. One common request from US negotiators concerns the participation of developing countries (Shogren, 2000) as they may be the largest emitters of greenhouse gases later in the century. Case 6 depicts an alternative solution where the USA sticks with the previous administration’s target of the Kyoto Protocol while developing countries agree in return to a uniform reduction compared to business-as-usual levels without compromising both their welfare and their future development. The proposal is a mix of the Kyoto 7
The choice of the OOECD target (7.3%) is calibrated in such a way that this number brings about a 5.2% reduction in Annex I countries by 2010 as mentioned in the Protocol. 8 This is because the shape of its cost curve is negative in the early phases of abatement and then very steep.
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B. Hamaide / Climate Policy 3 (2003) 171–177
Protocol for the OECD and a uniform reduction for non-OECD nations. In this hypothetical scenario, the largest burden is obviously borne by OECD nations, FSU would derive positive net payoffs contrary to its Kyoto objective; and because of their low marginal cost curves, developing countries should not theoretically be harmed by the proposed uniform reduction. Social loss decreases greatly compared to the original Protocol (1142 < 6495) and it is the most aggressive environmental policy as global emissions are substantially reduced by an overall 28.7%.
4. Conclusion Pure economic cooperation has the advantage of finding the least expensive or most beneficial policy by requiring more abatement where it is cheaper. If economic cooperation is a rational way of proceeding, worldwide negotiation over the past 10 years relied to “political” rather than “economic” cooperation. Over the years, equity issues, the acceptance of historical and current responsibilities, financial capabilities and other political elements have slowly replaced the objective of economic efficiency. The large environmental impact of the Kyoto Protocol (20.8% reduction) is expected to be reached at the expense of rich countries, among which the United States. Economically, the US reaction of dropping its participation from the Protocol is not too surprising, and the reaction of Europe to nevertheless implement it can be considered as a good example of environmental conscientiousness. Environmentally, the Protocol without the United States has a much more limited impact for a still bad economic efficiency. Politically, the USA has denied 10 years of negotiations, intermediate agreements and “subsidy-to-the-poor” philosophy. Looking at the “economic” cooperation rather than the “political” cooperation, contrary to what has been done by all parties since the beginning of the negotiations, may thus be one of the factors underlying the USA pullout from the Kyoto Protocol. Now that the United States has shown that it will not untie environmental and political from economic objectives, contrary to Europe, an important exogenous economic stimulus seems to be the only way of re-engaging them. In that sense, the emission targets of the Kyoto Protocol for OECD countries coupled with a uniform reduction elsewhere large enough to have an environmental impact and small enough for not hindering development may be a credible alternative. Provided that the data trends of the numerical analysis are correct and that a negotiated agreement about the form and timing of the non-OECD effort can be reached, this scenario may bring the US back on the table. Indeed, without being efficient—which does not seem critical, as “economic” cooperation may not be the main objective—, it may hold both from its effectiveness—large abatement and its burden-sharing rule—larger burden on OECD countries but participation of some non-OECD nations for a re-engagement of the USA.
References Chander, P., Tulkens, H., van Ypersele, J.-P., Willems, S., 1999. The Kyoto Protocol: An Economic and Game Theoretic Interpretation, CORE Research Paper. Center of Operations Research and Econometrics, UCL, Belgium. Cline, W.R., 1992. The Economics of Global Warming. Institute for International economics, Washington, DC. Hamaide, B., Boland, J.J., 2000. Benefits, costs and cooperation in greenhouse gas abatement. Climatic Change 47, 239–258. Hamaide, B., 2002. Economic and Environmental Impacts of Various Climate Policy Scenarios, Cahier CEREC 2002/3. Facultes Universitaires Saint Louis, Belgium. Nordhaus, W.D., 1994. Managing the Global Commons: The Economics of Climate Change. MIT Press, Cambridge, MA, USA.
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Nordhaus, W.D., Yang, Z., 1996. A regional dynamic general equilibrium model of alternative climate change strategies. Am. Econ. Rev. 86, 741–765. OECD, 1993. The Costs of Cutting Carbon Emissions: Results from Global Models. OECD, Paris. Shogren, J., 2000. Benefits and costs of Kyoto. In: Carraro, C. (Ed.), Efficiency and Equity of Climate Change Policy, Elsevier, The Netherlands, pp. 17–42.
Viewpoint
“Economic” and “Political” cooperation in various climate policy scenarios Bertrand Hamaide a,b,∗ a
Facultés Universitaires Saint Louis, CEREC, 43 Boulevard Botanique, 1000 Brussels, Belgium b Faculté Universitaire des Sciences Agronomiques, Gembloux, Belgium
Received 13 June 2002; received in revised form 12 September 2002; accepted 18 December 2002
Abstract Cooperation in the economic sense considers efficiency issues. Cooperation in the political sense, like the Kyoto Protocol, considers other issues like equity and historical responsibility. The environmental and economic impacts of the Kyoto Protocol and other scenarios are thus examined. The US pullout may then be viewed, among others, as the result of not untying “economic” and “political” cooperation; and since the Protocol will be much less effective without the US, it is shown that an external economic stimulus should and may theoretically be found for retaining their participation. © 2003 Elsevier Science Ltd. All rights reserved. Keywords: Climate policies; Cooperation; Efficiency; Equity; US participation
1. Introduction The economic analysis and the resulting environmental impact of worldwide cooperation versus a non-cooperative behavior are very well documented.1 Since the early discussions about emissions reduction at the Earth summit in 1992, some countries showed a willingness to curtail emissions while others did not; hence, partial cooperative scenarios, and their impacts on regional and global abatement as well as welfare, can also be examined from a purely economic perspective. This is done in Section 2. The other part of the paper departs from the pure economic analysis to evaluate the impacts of various political scenarios, incorporating equity and historical responsibility ideas, among which uniform emission reductions and the Kyoto Protocol with and without the participation of the United States. General conclusions are then derived in the final section. ∗
Tel.: +32-2-211-7811; fax: +32-2-211-7997. E-mail address: [email protected] (B. Hamaide). 1 See for example Cline, 1992; Nordhaus, 1994; Nordhaus and Yang, 1996; Chander et al., 1999. 1469-3062/03/$ – see front matter © 2003 Elsevier Science Ltd. All rights reserved. doi:10.1016/S1469-3062(03)00031-7
172
B. Hamaide / Climate Policy 3 (2003) 171–177
Table 1 Regional net benefits (Wj ) in billion USD for a uniform 16.6% abatement compared to cooperative and non-cooperative “economic” net benefits Wj
USA OOECD FSU China ROW W
R = 16.6%
Non-cooperation
Wj cooperation
113 906 1244 735 3139 6136
354 624 1139 667 1571 4355
282 1105 1468 637 2813 6305
2. “Economic” aspects of cooperation A simple five-region static formulation of estimated variables from 1990 to 2100 is used to compute net benefits of cooperative, non-cooperative and partial cooperative policies. Obviously, hypotheses used in the cost-benefit formulation have an impact on the results, which should then be interpreted with caution.2 Economically speaking, the non-cooperative strategy implies that, by ignoring the impact of its emission policy on others, a region maximizes its own welfare (net benefit) while taking as given the behavior of the others. The other side of the coin, full cooperation, is reached when all countries act as if they are a single entity thereby internalizing the externality by maximizing their global net benefit. In between lies partial cooperation where cooperating countries maximize their global payoff and non-cooperating regions act selfishly by only considering their own net benefit. The economic outcome of the numerical analysis reveals four main points. First, as expected, abatement and global net benefits are higher at full cooperation (16.6% versus 5.8% abatement, net benefits Wj being depicted in Table 1). Second, the non-cooperative scenario is such that the United States and China free ride (do not abate anything) because their own abatement cost is larger than their own benefit. Third, developing nations bear most of the abatement burden at full cooperation3 because their marginal abatement cost is lower than in the developed world4 (and from an efficiency perspective, those with lower abatement costs should abate more than those with higher costs so as to minimize total costs). Fourth, the grand coalition and any sub-coalition involving at least one developing region can be economically viable provided that south–north transfers are accepted, that is as long as poor countries attract rich countries in the coalition by side payments (as abatement is more expensive for the latter). In conclusion, cooperation in the economic sense is purely guided by economic rationality. But truly, there are other considerations in negotiating a climate agreement. One of the most important aspect underlying the Kyoto Protocol is the recognition that the developed world has benefited from the use of 2
The full description of the model mentioned in this section as well as the hypotheses and their justification, the results and the caveats can be found in Hamaide and Boland (2000) for the cooperative and non cooperative case and Hamaide (2002) for partial cooperation. 3 Note that ROW (rest of the world) reduces emissions far more than any other region, both in non-cooperation and in cooperation. This is due to the fact that their estimated abatement cost curve is negative over the first 15% emissions reduction range; hence ROW would greatly benefit from abatement. 4 This is consistent with most numerical analyses (OECD, 1993).
B. Hamaide / Climate Policy 3 (2003) 171–177
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resources since much longer than developing nations and still emits more carbon dioxide; consequently, richer nations have to lead the way in reducing CO2 . Therefore, it is fair to postulate that there should not be transfers from the south to the north: even if it is economically efficient, it is not politically acceptable to disproportionately place the burden on developing nations in terms of abatement and transfer payments. Cooperation in the economic sense should be (and is being) supplemented and even overthrown by cooperation in the political sense incorporating equity and historical responsibility.
3. “Political” aspects of cooperation The purpose of this section is less the economic analysis than the pragmatic analysis. The idea is to evaluate and compare the economic impact and the resulting abatement of various policies that have been discussed over the years since the Earth Summit or that are purely hypothetical (uniform reductions, stabilization policies and Kyoto type strategies). 3.1. Uniform reductions Command-and-control policies are the most widely used tools in environmental policies and one of the most common options is the uniform reduction; this is why it is considered here. The best uniform target is obviously a policy bringing about the optimal cooperative abatement, that is 16.6% reduction as shown in Fig. 1. Resulting regional net benefits are displayed in Table 1. By imposing a uniform abatement and not a reduction based on regional cost curves, the burden is now shared evenly instead on being mostly placed on developing nations (but the feasibility of a reduction for poor countries is yet to be analyzed and accepted politically). Resulting welfare is slightly smaller than at full cooperation (6136 < 6305) but distributed to the advantage of poor nations: the three non-OECD groups (Former Soviet Union (FSU), China and the rest of the world (ROW)) are better off than at non-cooperation. The loss of USA can easily be compensated by transfer payments from the OOECD (other OECD countries) alone for the scenario to hold theoretically. And since a uniform percentage
Fig. 1. Net benefit of abatement.
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B. Hamaide / Climate Policy 3 (2003) 171–177
Table 2 Regional net benefits (Wj ) in billion USD and emissions reductions (Rj ) in percentage, for various stabilization and Kyoto policies Case 1
USA OOECD FSU China ROW W, Θ, R
Case 2
Case 3
Case 4
Case 5
Case 6
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
Wj
Rj
−4654 −5983 612 1940 3057 −5028
46.5 52.2 0 0 0 17.1
−2761 −2474 1762 −5554 −6668 −15695
46.5 52.2 0 64.5 53.3 49.4
−4033 −4838 1740 2015 5151 35
46.5 52.2 15.3 16.2 16.4 27.6
−5231 −6510 −823 2353 3716 −6495
49.8 55.3 28.2 0 0 20.8
753 −7425 −1121 1417 2229 −4147
0 55.3 28.2 0 0 12.5
−4764 −5648 1780 2139 5351 −1142
49.8 55.3 15.3 16.2 16.4 28.7
reduction is the easiest method to implement, it could have been a good alternative to the targets set out in Kyoto. During the negotiations, it has however been estimated that developed countries should do the first and largest step. For that reason, it is interesting to compare the impact of stabilizing emissions (and not concentration) in OECD as originally proposed in the Framework Convention on Climate Change in 1992 and decreasing emissions in the same countries compared to 1990 levels as proposed in the Kyoto Protocol. 3.2. The stabilization scenarios The three scenarios are as such: stabilization of OECD emissions at their 1990 levels while non-OECD emissions go “business-as-usual” (case 1), are limited by a ceiling (case 2) and are reduced by 16.6% with respect to “business-as-usual” levels as of 2010 (case 3).5 Regional net payoffs and abatement efforts are displayed in Table 2. Stabilizing emissions in OECD is costly for rich countries whereas poor countries derive benefits from abatement in the developed nations.6 Social welfare is very negative (W = −5028) for a larger global abatement than at full cooperation (17.1%). However, the environmental advantage of that policy needs to be traded off against the global economic loss it brings about. The second policy option restricts emissions of non-OECD countries below twice their 1990 levels until 2100. The former Soviet Union does not undertake any abatement as it less than doubles emissions over the period considered but China and ROW are very much restricted because of their rapidly increasing emission trend in business-as-usual conditions (65 and 53% reduction, respectively). Therefore, social welfare is even more negative than in the previous scenario where OECD acts by itself. On the environmental side, this is a seemingly favorable option since there is a global emissions cut of 49.4% but it would be done at the expense of developing countries, which is thus inapplicable in policy negotiations. If the non-OECD countries’ ceiling is replaced by the interesting uniform reduction scenario in that part of the world while OECD nations stabilize their emissions, social welfare becomes slightly positive 5 Emission restrictions in the remaining part of this paper are computed with respect to business-as-usual levels as of 2010 like established in the Kyoto Protocol. 6 Note that FSU would nevertheless have had an incentive to abate up to its non cooperative point and not to completely free ride as the cost of its first emissions restrictions is negative—but that is not taken into account here as the hypothesis is that non OECD countries go business-as-usual.
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(W = 35) and abatement reaches 27.6%. This third scenario, while being economically inefficient, has various advantages. First, OECD’s net payoffs are less negative than if they act alone. Second, the burden of abatement is placed on rich nations who historically are the largest user of the world’s resources. And third, non-OECD’s payoffs are all positive, contrary to the previous option and even higher than at cooperative and non-cooperative equilibrium. 3.3. The Kyoto scenarios Instead of stabilizing emissions in developed nations, the Kyoto Protocol went further and asked for emission reductions in the OECD and stabilization in the FSU. Three additional scenarios are considered. The fourth one is the original Kyoto Protocol, the fifth one is the Protocol without the USA and the last one is the Protocol with a uniform reduction of 16.6% in the developing world as of 2010. Resulting emission reductions and net benefits are illustrated in Table 2. The original Kyoto Protocol negotiated in 1997 is aimed at reducing emissions by an average of 5.2% (respectively 0, 7 and 7.3% for FSU, USA and OOECD7 ) in 2008–2012 in Annex I countries compared to 1990 levels while the others go business-as-usual. Compared to the stabilization scenarios, OECD countries make a larger reduction, worsening their net loss, and FSU is losing as well in stabilizing its emissions.8 Non-OECD countries, being unrestricted, get large positive net payoffs but it is not sufficient to cover the loss of the other regions and therefore, social welfare is largely negative. Economically speaking, computations show that the Kyoto Protocol is not an acceptable solution. Nonetheless, its environmental impact is fairly large (20.8% reduction, which is higher than the economically efficient cooperation of 16.6%) and developed nations face their responsibility of historical exploitation of the commons. The justification of the negotiated Protocol may therefore be a tradeoff of economic efficiency for environmental and political purposes, or a way of paying back past external costs. In 2001, the Bush administration refused to ratify the Protocol. If this can make economic sense, looking at the rough numbers exposed above, it did change the global picture and the global idea behind the Protocol. First, the Protocol was denied its apparent prime importance for environmental objectives and political cooperation rather than economic efficiency. Then, the free riding position of the USA might have induced other nations like OOECD (whose net loss increases from 6510 to 7425) and FSU to follow that lead. Because of the worldwide outrage following its decision and for the remaining Protocol not to break apart, the USA is proposing an alternative solution for itself but some large OECD countries (the umbrella group: Canada, Australia and Japan) are still hesitating about their final position on the ratification. Provided that the USA is free riding—which is their non-cooperative economic result—but that the umbrella group and the FSU are ratifying the Protocol, global curtailment is now down to 12.5% (case 5), that is about 40% less than the original expected environmental impact. One common request from US negotiators concerns the participation of developing countries (Shogren, 2000) as they may be the largest emitters of greenhouse gases later in the century. Case 6 depicts an alternative solution where the USA sticks with the previous administration’s target of the Kyoto Protocol while developing countries agree in return to a uniform reduction compared to business-as-usual levels without compromising both their welfare and their future development. The proposal is a mix of the Kyoto 7
The choice of the OOECD target (7.3%) is calibrated in such a way that this number brings about a 5.2% reduction in Annex I countries by 2010 as mentioned in the Protocol. 8 This is because the shape of its cost curve is negative in the early phases of abatement and then very steep.
176
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Protocol for the OECD and a uniform reduction for non-OECD nations. In this hypothetical scenario, the largest burden is obviously borne by OECD nations, FSU would derive positive net payoffs contrary to its Kyoto objective; and because of their low marginal cost curves, developing countries should not theoretically be harmed by the proposed uniform reduction. Social loss decreases greatly compared to the original Protocol (1142 < 6495) and it is the most aggressive environmental policy as global emissions are substantially reduced by an overall 28.7%.
4. Conclusion Pure economic cooperation has the advantage of finding the least expensive or most beneficial policy by requiring more abatement where it is cheaper. If economic cooperation is a rational way of proceeding, worldwide negotiation over the past 10 years relied to “political” rather than “economic” cooperation. Over the years, equity issues, the acceptance of historical and current responsibilities, financial capabilities and other political elements have slowly replaced the objective of economic efficiency. The large environmental impact of the Kyoto Protocol (20.8% reduction) is expected to be reached at the expense of rich countries, among which the United States. Economically, the US reaction of dropping its participation from the Protocol is not too surprising, and the reaction of Europe to nevertheless implement it can be considered as a good example of environmental conscientiousness. Environmentally, the Protocol without the United States has a much more limited impact for a still bad economic efficiency. Politically, the USA has denied 10 years of negotiations, intermediate agreements and “subsidy-to-the-poor” philosophy. Looking at the “economic” cooperation rather than the “political” cooperation, contrary to what has been done by all parties since the beginning of the negotiations, may thus be one of the factors underlying the USA pullout from the Kyoto Protocol. Now that the United States has shown that it will not untie environmental and political from economic objectives, contrary to Europe, an important exogenous economic stimulus seems to be the only way of re-engaging them. In that sense, the emission targets of the Kyoto Protocol for OECD countries coupled with a uniform reduction elsewhere large enough to have an environmental impact and small enough for not hindering development may be a credible alternative. Provided that the data trends of the numerical analysis are correct and that a negotiated agreement about the form and timing of the non-OECD effort can be reached, this scenario may bring the US back on the table. Indeed, without being efficient—which does not seem critical, as “economic” cooperation may not be the main objective—, it may hold both from its effectiveness—large abatement and its burden-sharing rule—larger burden on OECD countries but participation of some non-OECD nations for a re-engagement of the USA.
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