Munich Economic Summit
Friday, 29 May 2009
Henk Folmer
Professor of General Economics, Department of Social Sciences, University
of Wageningen
OPEC versus Kyoto
The presentation is made up of two parts. In the first, The
Kyota Protocol (KP) and EU Emission Trading, I discuss the objectives of the
KP: to mitigate the impacts of of global climate change via the reduction
of anthropogenic emissions of greenhouse gases.
I also address the principle of common but differentiated responsibilities
and present an overview of the obligations of the industrialized countries
and of the developing world.
I furthermore discuss the flexibility mechanisms which are aimed at reducing
the overall costs of committing to the abatement obligations, i.e.
- The Bubble
- Joint Implementation (JI) and the Clean Development Mechanism (CDM)
- International Emmissions Trading (IET) among industrialized countries
I conclude the discussion of the KP with an overview of the weaknesses and pitfalls of the KP and its flexible mechanisms.
Next I turn to the The EU emission trading mechanism and describe its a two-stage system. The EU negiotiates as a single party at KP level. At the second stage it differentiates its total obligation among the EU countries in a burden sharing agreement. I present an overview of the sectors to which the mechanis applies and the allocation mechanism of the emission permits. Finally, I address the weaknesses of the mechanisms, the proposals for improvement and EU initiatives for a world-wide emission trading scheme.
The second part of my presentation, OPEC versus Kyoto?, starts with a brief
sketch of OPEC, particularly, its mission, production volumes, market power
and position relative to the KP. Next I address:
- the green paradox, i.e production expansion by the oil producing countries in response to the threat of an expected decline of future prices due to gradual reduction of oil consumption in abating countries
- carbon leakage, i.e. an an increase in oil consumption in non-abating countries in response to their comparative advantages as a consequence of CO2 reductions in abating countries, and
- environmental capital flight, i.e.realocation of firms from abating countries to non-abating countries
I discuss the arguments pro and con as well as the empirical support for each and conclude that the there is more evidence against than in favor of each hypothesis under normal condition. However, the empirical evidence is weak.
The remainder of my presentation is devoted to the development of oil prices and its impacts on greenhouse gas emissions. I discuss the substitution away from oil and point out that this need not lead to a decline of greenhouse gas emissions, not even in the case of a switch to biofules.
Finally, I discuss the impacts of the present recession on climate change. I point out that the consumption of fossil fuels has substantially decreased which is positive as far global warming is concerned. However, it may also reduce incentives to substitute away from oil and slow down development and large scale introduction of alternative types of energy including low-carbon. Therefore, both high and low prices of fossil fuels should be supported by accompanying policies, e.g. subsidies on research and development, to foster energy transition.
