Marginal abatement costs of CO2 emission reductions, geographical flexibility and concrete ceilings: an assessment using the POLES model

The Kyoto Protocol envisage the setting-up of flexibility mechanisms allowi ng Annex B countries to fulfil their commitments to reducing greenhouse gas es with respect for the principle of economic efficiency. The current negot iations relate in particular to the possibility of setting up a system of t radable emissions permits for Annex B countries and also of introducing "ce ilings" to trade. This paper analyses the stakes and economic potential of adopting this instrument, both for those countries that made commitments in Kyoto and for developing countries. It is based on a formal approach that allows for a consistent framework of analysis. The emission permit market, is, in fact, simulated on the basis of a reference scenario and of marginal abatement cost curves and estimated by the POLES model; after analysing th ese marginal abatement cost curves and comparing them with those produced b y other models, we explore two different configurations for a competitive m arket: a market limited to the Annex B countries and a world market. The re sults produced by the model show that widening the market to include develo ping countries is more effective than the Annex B market solution; it reduc es the cost of implementing Kyoto for OECD countries and at the same time a llows the countries of the South to benefit from selling the permits. This research also shows that introducing restrictions on exchanges for Annex B countries could have a counter-productive redistribution effect, with the e thical argument that underlies that particular measure. (C) 1999 Elsevier S cience Ltd. All rights reserved.