The Cost of Kyoto Protocol Targets: The Case of Japan
by Paltsev, S., J. Reilly, H.D. Jacoby and K.H. Tay (July 2004)
Joint Program Report Series, 27 pages, 2004
This paper applies the MIT Emissions Prediction and Policy Analysis (EPPA) model to analysis of the cost of the Kyoto Protocol targets, with a special focus on Japan. The analysis demonstrates the implications of the use of different measures of cost, and explains the apparent paradox that the relative carbon price among Kyoto parties may not be an accurate measure of their relative welfare costs. Attention is given to the role of relative emissions intensity and various distortions, in the form of fuel and other taxes, in determining the burden of a climate policy. Also, effects of climate policy on welfare through an influence on the terms of trade are explored. We consider the cases of the EU, Japan, and Canada, each meeting their Kyoto targets, and the US meeting the Bush Administration's intensity target. For a country with a low emissions intensity as in Japan, the absolute reduction in tons is small relative to the macroeconomy, and this reduces its welfare loss as a share of total national welfare. Low emissions intensity (high energy efficiency) also means the economy has few options to reduce emissions still further, resulting in a higher carbon price. Energy efficiency thus pushes in both directions, lowering the number tons that need to be reduced but raising the direct cost per ton. But other factors also are important in explaining costs differences. Existing fuel taxes are very high in Japan and Europe, increasing the economic cost of a greenhouse gas emissions reduction policy. For these regions, the extra cost due to these distortions is several times the direct cost of the emissions mitigation policy itself. In contrast, fuels taxes are low in the US and relatively low in Canada. The US, EU, and Japan gain somewhat from reductions in world prices of oil and other fuels because they are net importers. Canada, in contrast, is a significant net energy exporter, and its policy costs rise considerably because of lost energy export revenue. This effect on Canada is due mostly to implementation of the policy in the other regions rather than to domestic implementation. Canada is also the most emissions intensive of these regions, a factor that contributes to its cost of control.
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