Costs of compliance with the Kyoto Protocol: a developing country perspective

Abstract

Mexico is currently the 15th largest emitter in the world of greenhouse gases and by far the largest source of such emissions in Latin America. Thus, from a strategic standpoint, Mexico's decision to abide or not by carbon emission restrictions in the future is a matter of relative significance. Mexico has found itself under intense pressure to join with the world's industrialized economies and develop a plan for limiting its use of carbon-based energy sources in the future. Such a plan would, of course, entail economic costs and could significantly limit future growth, investment, and consumer welfare. A carbon tax may reduce the growth rate of carbon emissions as well as impose constraints on sector-related and overall economic growth. Nonetheless, it has a progressive effect on welfare levels in all simulations, meaning that it benefits (or harms less) the groups with lower income levels. On the other hand, a Double Dividend is very unlikely to result from this policy. Only under significantly high rates of technological change in the Mexican economy, namely of 5–6%, can a reduction in the rate of growth of carbon emissions and an increase in welfare be attained for all income groups simultaneously. At the same time, high rates of technological change increase production and therefore emissions. Overall, there are strong benefits from the application of this policy in that it reduces the growth rate of carbon emissions. This exercise is a first approach to the application of an ample environmental tax to a developing country and results show that a favorable outcome may be expected. However, estimating the costs of practical policies to make investment in energy-saving technological change attractive to producers has yet to be addressed.