Dynamic consistency problems behind the Kyoto Protocol

This paper examines the economic rationale behind both the quantitative tar gets and the flexibility mechanisms adopted in the Kyoto Protocol. It synth esizes some theoretical dimensions of the debate about the so-called 'when flexibility' of climate policies, explaining the importance of the interpla y between uncertainty and techno-economic inertia. Numerical results show t hat the aggregate Kyoto abatement target is consistent with a stochastic dy namic optimum in which a 450 ppm concentration ceiling is seriously conside red. Turning to the EU-US debate about the interpretation of the 'supplemental t o' condition in Article 3 of the Kyoto Protocol regarding the articulation between international trading systems and domestic policies and measures, t his paper illuminates the risk of dynamic inconsistencies due to the hetero geneity of capital stocks in the economy, if price signals do not emerge in due time from greenhouse gas trading systems because of the 'hot air' in s ome countries and the discovery of low cost abatement potentials in Annex B countries. Numerical simulations show that a delay of action on sectors with large ine rtia of capital stocks may, under such circumstances. undermine the economi c viability of climate policies beyond 2012. Some lessons are derived from the future of climate policies and negotiations about the implementation of the Kyoto Protocol.