An assessment of the EU proposal for ceilings on the use of Kyoto flexibility mechanisms

The Kyoto Protocol is the first international environmental agreement that sets legally binding greenhouse gas emissions targets and timetables for An nex I countries. It incorporates emissions trading, joint implementation an d the clean development mechanism. Because each of the articles defining th e three flexibility mechanisms carries wording that the use of the mechanis m must be supplemental to domestic actions, the supplementarity provisions have been the focus of the international climate change negotiations subseq uent to Kyoto. Whether the supplementarity clauses will be translated into a concrete ceiling, and if so, how a concrete ceiling on the use of the thr ee flexible mechanisms should be defined remain to be determined. To date, the European Union (EU) has put forward a proposal for ceilings on the use of these flexibility mechanisms. Given the great policy relevance to the on going negotiations on the overall issues of flexibility mechanisms, this pa per has provided a quantitative assessment of the implications of the EU ce ilings with and without considering the however clause. Our results suggest that such ceilings are less restrictive to the EU than to the US and Japan in terms of level of restriction on permit imports, and can prevent one-th ird of the amount of hot air from entering the market. Our results also dem onstrate that although the US and Japan are firmly opposed to such a restri ction, they tend to benefit more from it than the EU, which strongly advoca tes such ceilings, in terms of the reduction in the total abatement costs r elative to the no trading case. Moreover, their gains can increase even fur ther, provided that the however clause operates as intended. (C) 2001 Elsev ier Science B.V. All rights reserved.