ECN paper
The Role of Kyoto Mechanisms in Reducing Greenhouse Gas Emissions

Paper presented at the Seminar Climate Negotiations and Emissions Trading - Economic Insight from European Models, Brussels, 29-30 August 2000

by D.J. Gielen, T. Kram

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This paper provides an overview of recent insights from MARKAL modelling activities at ECN. The models have been extended in order to cover the full spectrum of Kyoto mechanisms. Using varying new modelling approaches the bottom-up MARKAL type models can provide new insights regarding optimal policy selection. The goal of this paper is to provide an overview of the methodology and the results. The analysis indicates that non-CO2 GHG emission reduction is a key strategy for emission reduction representing 25% of the total EU emission reduction in the Kyoto period. The bulk of non-CO2 emissions is not energy related. Agriculture is an important source of non-CO2 emissions. Forestry is important because of the carbon storage potential and the potential to produce renewable biomass. The calculations show that greenhouse gas emission reduction may well have significant impacts on agriculture and forestry on the long term. MARKAL studies for non-EU countries allow the identification of important strategies and key projects for CDM (Clean Development Mechanism) and JI (Joint Implementation). If all Kyoto mechanisms and all reduction potentials can be used, the global equilibrium price of emission credits can be as low as 3 8 EUR/t CO2 eq. (excluding transaction costs and assuming an ideal market). If non-CO2 reduction options are excluded the equilibrium price of CO2 emission credits will be significantly higher, up to 15 EUR/t. The inclusion of non-CO2 gases will increase the annual global trade in emission credits from 1.4 Gt to 1.9 Gt in the Kyoto period. Non-Annex 1 countries may benefit from important secondary benefits of GHG emission reduction, for example an improvement of the local air quality. However the relevance of such benefits should not be overestimated, given cheap competing end-of-pipe technologies.

New insights regarding carbon leakage and regarding regional economic impacts of GHG policies have been obtained by applying a MARKAL type global sector model for the petrochemical industry. The calculations suggest that despite the significant technological potential to reduce emissions, an ambitious global GHG policy will affect the industry location selection in favour of developing countries. The extent of relocation of Western European industries is approximately twice as high in case non-Annex 1 countries are not included in future GHG policies for this industry sector. Finally the optimal selection of policy instruments has been investigated. Policies aiming for a long term target of 50% emission reduction based on generic pricing instruments can reduce costs for Western Europe by as much as 150 billion EUR per year in 2030, compared to policies with ambitious regulation and exclusion of exposed sectors.