Cost of implementing Kyoto Protocol could exceed $1 trillion over twenty years

Insights on the Kyoto Protocol: Impact on Trade Patterns and Economic Growth in 25 Countries was compiled by the US research group Charles River Associates for the American business group on climate change, Global Climate Coalition (GCC), and is currently circulating at talks in The Hague aimed at thrashing out international agreement on implementing the terms of the Kyoto Protocol. Its most startling revelation is that only with the full participation of developing countries in a system of global permit trading can costs be kept significantly below $1 trillion, which is not an option on the agenda under the Protocol.

The report also alleges that limiting fossil fuel use to meet Kyoto Protocol targets requires moving developed countries away from low-cost energy sources, which will impose costs on undeveloped nations, the report says.

Switching to higher cost fuels and investing for energy efficiency will divert resources from producing goods and services that contribute to economic welfare, it says. The discounted present value of the loss in consumption from 2010 to 2030 could range from $1.4 trillion to $900 billion under Kyoto. However, the report says, with greater use of flexibility mechanisms such as permit trading among developed nations and investing in low-cost emission reductions in developing countries instead of at home, costs can be kept to the lower end of the range. Countries like the US (see story under ‘North America’ section this week) and Australia (see related story) favour greater flexibility, but the EU is set against it (see related story).

Implementing the Protocol would therefore slow growth in developed countries, and trade distortions would be introduced into the international economy, benefiting some developing countries, but hurting others, says the report. It argues that the costs of compliance with Kyoto will be shifted onto some developing nations, who will be caught in a trade squeeze, paying more for goods from developed nations and receiving less for their own exports.

The report also argues that the Protocol creates diverse winners and losers: Some developing nations gain competitive advantages over energy intensive industries in developed nations whose costs are driven by Kyoto to “non-competitive levels”. These developing nations can be expected to support strong action by richer countries and limits on the use of flexibility mechanisms. Losers among the developing world would include Mexico, Indonesia, South Africa and Nigeria, but China, India, Brazil and former Soviet Union countries stand to gain.

Energy-exporting countries will face higher costs than even the developed countries, losing revenue from their energy exports, the report says. Even among developed nations, costs are uneven, with some gaining, such as Germany, and some, like the US and UK losing out from the greater use of flexibility mechanisms.

“The most important thing about the report is that it shows that even under the best of assumptions allowing for mechanisms such as emissions trading, the Kyoto Protocol will be a very expensive process to implement,” Phillip Cooney, Team Leader at GCC told edie.

The other economies under scrutiny in the report are: Argentina, Australia, Austria, Canada, Colombia, Denmark, Egypt, France, Indonesia, Italy, Japan, Malaysia, Netherlands, South Korea, Taiwan and Venezuela.