Quantifying flexibility in combating climate change: modelling the implications of flexibility mechanisms in the climate change negotiations

With the 'International Trading of Emission Allowances' (ITEA) model we hav e analysed the flexibility mechanisms provided for in the Kyoto Protocol. T hree main mechanisms of flexibility are analysed: differentiation of initia l commitments, multiple sources, and locational flexibility (trading). A di fferentiation of commitments could help the evolution of commitments, espec ially with a trading regime, which could create some income. Multiple sourc es give a large pool of cheaper abatement options from the non-CO2 gases, a nd costs are reduced substantially. Finally, a trading regime would make av ailable even more cheap abatement options, mainly in the economies in trans ition (EITs). This regime would provide income support for the EITs, helpin g them to speed up their transition. The combined mechanisms reduce dramati cally the costs for the compliance with the protocol for the whole of Annex I; they fall to zero in some cases. Two other main findings deal with the EU and the EITs. Internal trading wou ld ease the debate on the internal distribution of commitments within the E U under the bubble provision, reducing costs significantly. The allocations in the protocol for the EITs probably create a huge excess - 'hot air' - w hich could seriously harm the agreement if it is not dealt with. Excluding the hot air will increase costs for the quota importers, sand it will also slightly reduce income for the relevant EITs, but this is offset by a risin g price, which also benefits other EITs.