Kyotos Impact on Trade and Growth

by William Yeatman on December 15, 2000

A new report by economists David Montgomery and Paul Bernstein of Charles River Associates makes it clear why the 180 countries involved in international negotiations to reduce greenhouse gases are having a tough time coming to an agreement. The problem is that there would be winners and losers under the Kyoto Protocol and the different compliance scenarios would produce different winners and losers.

According to the study, compliance with the Kyoto Protocol would result in a loss of economic welfare to the tune of $900 million to $1.4 trillion from 2010 to 2030. Flexibility mechanisms such as emissions trading and the Clean Development Mechanism could lower costs somewhat. “Only full participation of developing countries in a system of global permit trading can reduce costs significantly below $1 trillion, and the option is not a possibility under the Kyoto Protocol,” says the study.

These costs will not be limited to developed countries, however. Since all countries are linked through international trade, the costs of Kyoto will be partially shifted to developing countries. “Changes in patterns of international trade will shift costs of compliance with Kyoto onto some non-Annex B countries, who will be caught in a terms of trade squeeze, paying more for goods they purchase from Annex B countries and receiving less for the goods they sell.” Other developing countries will gain through increased competitive advantage over energy intensive industries in developed countries, whose costs will increase under Kyoto.

The Clean Development Mechanism, which allows developed countries to invest in low cost energy reductions in developing countries, could reduce costs of compliance. But, says the study, “The greatest issue with CDM is whether it will be so burdened with administrative costs and restrictions on the nature and location of projects, or taxed as a source of revenue for the Secretariat (the levy), that investment in CDM projects will not make good economic sense.”

Moreover, “Not all of the flows of funds into CDM represents a net gain to the host country. Projects that meet CDM guidelines will cost more than conventional projects, and the additional resources used to build CDM projects will not be available to produce goods sustaining the consumption needs of the population.”

The CDM, which was designed to transfer wealth from the developed to developing countries as an incentive for developing countries to participate, could produce division among developing countries. “Countries like China and India, that export energy-intensive goods and benefit from energy price increases in Annex B countries, can be made worse off by the success of CDM, because CDM reduces some of the global trade distortions that benefit those countries.”

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