Download The Economics of Kyoto and New Zealand

The Economics of Kyoto and
New Zealand
Background to the Kyoto Protocol
• Documented increases in global surface
temperature over the 20th century.
• Recognition that international co-operation would
be required to deal with this issue effectively.
• Previous voluntary agreements had proved
ineffective.
Details of the Kyoto Protocol
•
55 Developed countries to reduce emissions
levels of 5 GHGs to ~1990 levels by 2008-2012.
‘Harsh penalties’ for non-compliance.
•
Developing countries exempt from emissions
targets through first commitment period 20082012.
•
Kyoto seen as the first step in a broader, longterm response to climate change.
Motivation for Kyoto Protocol
• Climate change is a classic example of market
failure. The emission of GHGs imposes external
costs on other parties.
• Economic theory suggests intervention / regulation
to internalise the problem. However, the
externalities are international in this case.
• This is the basic problem with the Kyoto Protocol.
The scale of the issue (temporal and spacial)
renders the Protocol inherently unstable for several
reasons…
The Uncertainty Principle
• The costs to developed countries of meeting their
obligations will be substantial, and will be felt in the
short-term.
• However, the benefits of doing so are far from
certain.
• The external need for action must be balanced
with the internal need for policies to be politically
sustainable. Drastic measures will not be
supported without tangible payoffs.
• The issue of opportunity costs is also important in
the context of climate change uncertainty.
A Fair Deal?
• Under the Protocol, the emissions of GHGs within
developing countries are not covered.
• There is thus an incentive for established firms to
avoid emissions restrictions by relocating production
processes from developed countries to developing
countries.
• Such a situation would reduce output and
employment in the developed country, but have no
impact on total emissions. In fact, it may even lead to
a higher level of emissions overall.
The Best Response?
• The KP is oriented towards a long-term decline in
GHG emissions.
• However, a more reasonable (economic) response
might be a slow rise in emissions for several
decades followed by a rapid reduction nearer the
end of the century.
 Role of technological change.
• However, this approach is not politically acceptable
in the context of KP negotiations. This has been an
sticking point with several important developed
countries.
New Zealand’s Role in the KP
• New Zealand has been a long-term ‘supporter’ of
Kyoto.
• Our obligation under the KP: reduce emissions to
1990 levels by 2008-2012.
• Complex trade-offs between environment and
economy highlighted recently:
- The use of negotiated greenhouse agreements
(NGAs) with large-scale emitters,
- the abolition of the livestock tax,
- the scrapping of the carbon tax.
 Difficulty of enacting climate change legislation at
home...
The Prisoners’ Dilemma
• Ultimately, the Kyoto Protocol suffers all of the
problems of a prisoners’ dilemma. While
international co-operation is the best strategy
for all, the incentives for each country to defect
(‘free-ride’) are strong.
• This is especially so given the inability of third
parties to monitor countries’ emissions and
punish them for non-compliance.
Conclusion
• The Kyoto Protocol attempts to deal with the
problem of negative externalities, on an
international scale.
• To be effective, in the absence of a central
international authority, such an agreement requires
support across all nations.
• In reality, however, the divergent political and
economic perspectives of the various parties make
the negotiation and implementation of such an
agreement difficult, prolonged and expensive. To
be effective, the KP will likely need further work.