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Conclusion: We have provided evidence from a global economics model, that if the Kyoto Protocol can be made binding there is likely to be a reduction in greenhouse gas emissions at relatively low cost if permit trading is implemented and if all countries and not just Annex 1 countries participate. The appeal of an international permits program is strongest if participating countries have very different marginal costs of abating carbon emissions – in that situation, the potential gains from trade are largest. Our results show that within the Annex I and globally, abatement costs are indeed quite heterogeneous. The marginal cost of meeting Kyoto targets in the "Rest of the OECD" region is triple that of United States; and large quantities of relatively inexpensive emission reductions are available from the former Soviet Bloc and non-Annex I developing regions. These differences in abatement costs are caused by a range of factors including different carbon intensities of energy use, different substitution possibilities and different baseline projections of future carbon emissions. Because of these differences, international trading offers large potential benefits to parties with relatively high mitigation costs. Despite the attractiveness of permit trading , we argue that the Kyoto Protocol is fatally flawed because it does not address the problem of sustainability. A number of ways in which the protocol may collapse are presented. The most obvious example is the collapse of the permit price if a country reneges on the agreement. We also propose an alternative regime that is designed to yield the goals of UNFCCC but is more likely to be sustainable because it addresses some of the fundamental weaknesses of the Kyoto style approach to environmental policy. Our regime relies on a decentralized but coordinated system of permits and user fees that are maintained by individual governments. We remove the problems of international permit trading while using a permit trading scheme as a basis for our proposal in a way that addresses both the economic and political sustainability issues directly in regime design. It would have been better to have the debate about the sustainability of a regime, designed to meet the goals of the UNFCCC, before the political negotiations produced a protocol with the flaws that are potentially in the Kyoto Protocol. Nonetheless, it is not too late to have this debate, especially when one considers that the possible collapse of the Kyoto Protocol over the next decade will make the development of a realistic policy that actually slows greenhouse emissions, that much harder to achieve.

Introduction: The Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), which was negotiated in Kyoto in December 1997, is yet to be ratified. There are still many unresolved problems with implementing this convention--not least is the problem that the Kyoto Protocol is fundamentally unsustainable.1 Little progress in implementation of the Kyoto Protocol was achieved at previous meetings in Buenos Aires and Bonn. The next major negotiations will be held in The Hague in November 2000, although there will be intense activity leading up to this meeting, which will be the last serious chance for countries to implement the Kyoto Protocol. Rhetoric will not achieve the tight targets of the Kyoto Protocol and at some stage either actual policies must be implemented or the Kyoto Protocol must be jettisoned. The irony of the current state of climate change policy is that the Kyoto Protocol is actually raising greenhouse emissions because some corporations are postponing taking low-cost actions until it is clear what actions will be given credit in future abatement systems. Before taking the next step, it is worth reflecting on what a sustainable and realistic climate change policy should look like. First, the policy should slow down carbon dioxide emissions where it is cost-effective to do so, but only as an insurance policy until further information on climate change is accumulated. Second, the policy should involve some mechanism for compensating those countries who will be hurt economically without requiring massive transfers of wealth that could undermine economic stability. Third, since climate change is potentially a global problem, any solution will require a high degree of consensus both domestically and internationally. Few countries want to relinquish sovereignty, especially when the policies in question can have large economic effects. A system that does not ultimately include developing countries will do little to achieve the goals of the UNFCCC because these countries are large future emitters of carbon and because the cheapest reductions will be found where carbon-intensive capital investments have not yet been made. Fourth, the regime must allow new countries to enter with minimum disruption and also allow a core group of countries to continue to participate even if other countries exit the system at certain times. A system involving many countries that doesn't survive changing composition over time is destined to fail since the reality is that a country's commitment to the regime is a function of the commitment of political incumbents at any point of time. Given these criteria, the next step in climate change policy should not be in the direction taken by the negotiators at Kyoto. We propose here a different approach: one that sets the price of emission permits in the short run, but over the longer run, allows the market to determine the price of emission allowances.

The next major round of international negotiations on controlling global climate change is to be held later this year in Kyoto. The focus of talks to date has been on policies to reduce worldwide carbon dioxide emissions to 1990 levels and hold them there. A proposal by the United States would achieve this by creating a system of internationally tradable emissions permits. Although the U.S. proposal has attractive features and has been endorsed by a number of prominent economists, it has several serious flaws that would prevent the treaty from being ratified and implemented. First, it focuses exclusively on stabilizing emissions even though a much stronger case can be made for reducing the growth of emissions rather than allowing no growth at all. A second problem is that it would also be very difficult and expensive to monitor and enforce. Third, it would generate such huge transfers of wealth between countries that those generating most of the world's emissions would be unlikely to ratify the treaty. More important, these wealth transfers could cause dramatic changes in exchange rates, trade balances, and international capital flows and would put enormous stress on the world trading system. A better alternative would be to set up a system of national permits and emissions fees. Each country would be allowed to distribute tradable emissions permits equal to its 1990 emissions. Each government would also agree to sell additional permits at a fee specified in the treaty, say U.S.$10 a ton of carbon emitted. The effect of the policy would be to encourage firms to reduce emissions whenever they could do so at a cost of $10 a ton or less. Since this alternative does not focus on stabilization and instead aims at the more modest goal of reducing emissions where it can be done at low cost, and it includes an allowance for 1990 emissions, it is far more likely to be ratified and implemented. It would give firms an incentive to reduce emissions without causing huge international transfers of wealth and would avoid causing havoc in the system of world trade. Because the fee would be uniform throughout the world, the emissions reductions would be accomplished at minimum cost. Finally, the revenue raised by emissions fees would provide an incentive for individual governments to enforce the policy.

The Kyoto Protocol represents nearly a decade of international effort to reduce carbon emissions. While the treaty is the product of enormous international political effort, it is yet to be ratified by enough countries to enter into force, and it has been rejected by the United States. ¶ In this controversial new book, Warwick J. McKibbin and Peter Wilcoxen argue that the current approach of international negotiations on the Kyoto Protocol is going completely in the wrong direction. In Climate Change Policy after Kyoto, they attempt to steer the policy debate toward a realistic blueprint for effective policy.

Conclusion: The system we advocate is flexible enough to adapt to changing political, economic and climate circumstances. Most importantly, we believe that the system we have designed although simple in concept, solves many of the insurmountable problems of the Kyoto Protocol and delivers an outcome in which global emissions will be lower than otherwise would be the case.

The next major round of international negotiations on controlling global climate change is to be held later this year in Kyoto. The focus of talks to date has been on policies to reduce worldwide carbon dioxide emissions to 1990 levels and hold them there. A proposal by the United States would achieve this by creating a system of internationally tradable emissions permits. Although the U.S. proposal has attractive features and has been endorsed by a number of prominent economists, it has several serious flaws that would prevent the treaty from being ratified and implemented. One particular problem that we highlight is the potential instability this could cause to global financial markets and the world trade system. This paper outlines these flaws. We then propose an alternative policy regime that involves setting up a coordinated system of national permits and emission fees. Since this alternative does not focus on stabilization and instead aims at the more modest goal of reducing emissions where it can be done at low cost, and it includes an allowance for 1990 emissions, it is far more likely to be ratified and implemented. It would give firms an incentive to reduce emissions without causing huge international transfers of wealth and would avoid causing havoc in the system of world trade. Because the fee would be uniform throughout the world, the emissions reductions would be accomplished at minimum cost. Finally, the revenue raised by emissions fees would provide an incentive for individual governments to enforce the policy.

Annotation The Kyoto Protocol represents nearly a decade of international effort to reduce carbon emissions. While the treaty is the product of enormous international political effort, it has not been ratified by any major greenhouse emitter and it has been rejected by the United States. In this controversial new book, Warwick J. McKibbin and Peter Wilcoxen argue that the current approach of international negotiations on the Kyoto Protocol is going completely in the wrong direction. In Climate Change Policy after Kyoto, they attempt to steer the policy debate toward a realistic blueprint for effective policy. The authors believe that managing uncertainty -- particularly the future costs of any plan -- is key to realistic climate policy. They maintain that sustainable policy should meet four basic criteria: it should slow down carbon dioxide emissions where it is cost-effective to do so; compensate those who are hurt economically; require a high degree of consensus both domestically and internationally; and allow countries to enter the program easily and continue to participate even if they drop out of the agreement at certain times. The book summarizes the current state of knowledge about climate change and discusses the history of negotiations since 1992 -- in the process identifying the Kyoto Protocol as the wrong approach to the problem. It outlines important insights that economic theory offers for the design of climate policy, and uses those insights to develop a simple framework that will reduce greenhouse gas emissions while guaranteeing that short-run costs of compliance will not be excessive. The authors conclude by outlining a process by which international negotiations on climatecontrol can proceed to an agreement that is both durable and feasible for all nations

Conclusion: The system we advocate is flexible enough to adapt to changing political, economic and climate circumstances. Most importantly, we believe that the system we have designed although simple in concept, solves many of the insurmountable problems of the Kyoto Protocol and delivers an outcome in which global emissions will be lower than otherwise would be the case.