THEECONOMICS OF“WHEN” FLEXIBILITY IN THEDESIGN OFGREENHOUSEGASABATEMENTPOLICIES

Abstract

▪ Abstract This paper focuses on the desirability, from an economic perspective, of setting fixed and relatively short-term targets and timetables, such as those contained in the Kyoto Protocol, as a means of achieving longer-term climate change mitigation goals. The paper argues that whatever long-term policy goals are adopted, greater flexibility lowers implementation costs. Lower implementation costs, in turn, increases the likelihood that the policies will actually be followed and the goals achieved. Importantly, the Kyoto Protocol incorporates key elements of both “what” and “where” flexibility. That is, the “Kyoto basket” includes all six of the major greenhouse gases plus sinks, and the Protocol incorporates several mechanisms that allow emission reductions to take place at the least-cost geographic location, regardless of nation-state boundaries. The Protocol also provides substantial “how” flexibility in the sense that countries can use a variety of means to achieve domestic policy goals. However, the Protocol does not allow emission reductions to take place at a point in time when they can be achieved at lowest cost as long as they are consistent with the long-term environmental goals (“when” flexibility). Additionally, it does not allow the use of efficient price-based policy instruments to define targets and, thereby, balance environmental goals and compliance costs (which could be thought of as a broader version of “when” flexibility). Instead, the Protocol relies exclusively on strict, short term quantity targets. The relative inflexibility of the Protocol with respect to the timing of reductions and definitions of the targets may derive, in part, from a misplaced analogy between the global warming issue and the highly successful effort to phase out CFCs under the Montreal Protocol. The lack of when flexibility may be a key barrier to achieving the broader goals of the Kyoto Protocol, particularly if where flexibility is constrained in the implementation process.