The Kyoto Protocol: Effectiveness Issues and Hypotheses

establishing hypotheses about its environmental and economic aspects. Section 4.3 describes the data and specifies the methods employed in this chapter. As the previous chapter has defined and presented the impact evaluation technique combining the PSM and DID methods in detail, this section focuses on the specific models and two-time-period setting of this chapter. The empirical results of the environmental and economic effectiveness of the Kyoto Protocol and the predictions based on regression results are presented in Section 4.4, and the final section concludes this chapter.

Kyoto Protocol. According to the homepage of the UNFCCC (UNFCCC, n.d.), there are 192 Parties²⁰ to the Kyoto Protocol of the UNFCCC. Appendix 4.1 proposes the specific status of participants of the Kyoto Protocol.

Figure 4.1Member Countries of the Kyoto Protocol Source: Wikipedia (n.d.).

Note: Parties: Annex I and II countries with binding targets.

Parties: Developing countries without binding targets.

States not Party to the Protocol.

Signatory country with no intention to ratify the treaty, with no binding targets.

Countries that have renounced the Protocol, with no binding targets.

Parties with no binding targets in the second period, which previously had targets.

This protocol admits that developed countries are mainly responsible for the high levels of GHG emissions so far. Therefore, internationally binding emission reduction targets were set that imposed a heavier burden on Annex I Parties²¹ under the principle ofocommon

20 These include 191 States and EU.

21 Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, European Union, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia.

but differentiated responsibilitiesp. In the first commitment period, they have a responsibility for meeting at least 55 % of the total CO2emissions for 1990. Article of the Kyoto Protocol makes their emission reduction duty quite clear:

The Parties included in Annex I shall, individually or jointly, ensure that their aggregate anthropogenic carbon dioxide equivalent emissions of the greenhouse gases listed in Annex A do not exceed their assigned amounts, calculated pursuant to their quantified emission limitation and reduction commitments inscribed in Annex B and in accordance with the provisions of this Article, with a view to reducing their overall emissions of such gases by at least 5 per cent below 1990 levels in the commitment period 2008 to 2012. (Article 3)

What is unique about this protocol is that three market-based mechanisms have been offered to meet their emission reduction target. These flexible mechanisms: International Emissions Trading, Clean Development Mechanism (CDM), and Joint Implementation (JI), assist Annex I countries to meet their reduction obligations in a cost-effective way (de Chazournes, 1998). Paterson (2008) who claims about global governance for sustainable capitalism adduces the Kyoto Protocol as an example of global governance for sustainable perspective:

Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation , Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom of Great Britain and Northern Ireland, United States of America (UNFCCC, n.d.).

The climate change, as incarnated specifically in the Kyoto Protocol on Climate Change (1997) is perhaps the apogee of what I shall term global governance for sustainable capitalism. Key to Kyoto are three highly innovative

mechanismsnemission trading, Joint Implementation (JI) and the Clean

Development Mechanism (CDM). Collectively, these are now being referred to as the carbon market. (p. 110)

2 D65@? E96E96@C6E:42 =5:D4FDD:@? D@7E96" DV 67764E:G6? 6DD:? 2 7C2> 6H @C<@7E96

Porter Hypothesis that provides a clue of theoretical potential that the environmental effectiveness of IEAs can be connected to the economic effectiveness, the two-dimensional effectiveness of the Kyoto Protocol can be formulated by reviewing previous studies.

Therefore, the empirical models also focus on two hypotheses: The first aspect of effectiveness is the environmental effectiveness, which is estimated by the changes of environmental performance. In the case of the Kyoto Protocol, the level of CO2 emission reduction is the key standard of judgment because of data availability and its significant impact on global warming.

Indeed, some results of empirical testing have raised questions about the actual effectiveness of the Kyoto Protocol. Böhringer (2003) questions the effectiveness of the Kyoto Protocol, believing it to be a merely symbolic policy. He assesses the potential performance of the protocol and insists that there is no distinct emission reduction in the

initial commitment period. However, he concludes that, although there is no significant effective emission reduction in the first commitment period, the ratification of the Kyoto Protocol is crucial for the continuation of the policy process of climate protection.

Some studies that have showed the lack of effectiveness of political agreements in reducing emissions argue that the underlying main driving factors of CO2emissions are industrialization. Kumazawa and Callaghan (2012) demonstrate that differentemission

reduction patterns are shown in the industrialized countries that are duty-bound to reduceCO2

emissions.Huang et al. (2008) similarly argue that 38 industrialized countries are unable to meet their targets under the Kyoto Protocol within the specified time period.

On the other hand, arguments on the positive environmental effect of the Kyoto Protocol have indicated the decrease in CO2emissions. Considering the Kyoto Protocol and the CDM, Grunewald and Martínez-Zarzoso (2009) analyze the driving factors of CO2in terms of environmental regulations with a static and dynamic panel data model. They find that the obligations of the Kyoto Protocol have had a positive effect on reducing CO2

emissions in both developed and developing countries. Their recent research that analyzes the driving factors of CO2emissions with a dynamic panel data model for the period 1960 to 2009 also reveals that the obligations of the Kyoto Protocol have had a reducing effect on CO2emissions (Grunewald & Martínez-Zarzoso, 2011). UNFCCC (2012), which investigates the national GHG emissions from 1990 to 2010, representatively examines the total aggregate

GHG emissions among Annex I countries and finds that it had decreased significantly.

Specifically, 8.9 % of total GHG emission reductions are observed in all Annex I Parties.

However, it is difficult to distinguish the effect of Kyoto Protocol, since this report focuses on estimating simple changes of reduction over 1990m2010.

In brief, the results from previous studies on the environmental effectiveness of the Kyoto Protocol are open to dispute. One of the major limitations of existing literature is that they fail to distinguish how the IEA effect controls the characteristics of each nation. In this regard, some scholars have indicated the intrinsic difficulties of predicting impacts, such as dealing with hypothetical situations or controlling external factors (Aakvik & Tjøtta, 2011;

Frantzi, 2008; Underdal, 1992; Vollenweider, 2013). For example, socioeconomic status and the base level of pollutants differ from country to country; therefore, they have to consider in the quantitative analysis. Additionally, the IEA effect on emission reduction has already been analyzed in a previous study applying EKC theory, which is focused on the global trend of emission reduction, but not specifically on those countries participating in Annex I.

Therefore, there is a strong need to investigate more clearly the practical effect of the protocol on CO2emissions with proper models that can distinguish the effect of the

agreements. As is shown by the results of Aakvik and Tjøtta (2011), Kim et al. (2012) and Vollenweider (2013), quantitative analysis can capture the precise effect of emission

reductions. This motivates us to test the first hypothesis whether the Kyoto Protocol improves

environmental performance or not.

Hypothesis 1:Participating in Annex I of the Kyoto Protocol has a positive effect on the CO2emission reduction.

Only a few studies have analyzed the effect of the Kyoto Protocol on national economic performance, or on other IEAs. As for the concerns over the cost of policy

implementation, the existing empirical studies are skeptical about the economic effectiveness of the Kyoto Protocol. Nordhaus and Boyer (1999) conduct an economic analysis of the Kyoto Protocol and claim that the emissions policy is highly cost inefficient, as the net global cost of the protocol reached approximately 716 billiondollarsin their analysis. Böhringer et al.

(2001) also state that the spillover effects of carbon abatement in industrialized countries on 56G6=@A:? 84@F? EC:6D2 C6D:8? :7:42 ? E!6? 46 56DA:E6E96=24<@756G6=@A:? 84@F? ECJVD

reduction obligations, serious problems of fair burden sharing occur.

However, as a representative of the stringent and flexible international

environmental policies inherent in market-based mechanisms, the Kyoto Protocol encourages decreasing the negative effects on economic growth. There are some evidences from

empirical studies. For instance, Manne and Richels (1998) conduct two scenarios regarding CO2emission cost and detected that GDP losses in 2010 differed from those predicted by their scenarios. Therefore, they assert that the prospects for technical progress are

incorporated and so the costs of a carbon constraint will be minimal. According to Golub et al.

(2006), costs can decline significantly through market mechanisms, such as international permit trading. Huang et al. (2008) also mention that the position of the UNFCCC Secretariat is to decouple economic growth and GHG emissions:

The UNFCCC Secretariat has always advocated the concept that GHG emissions

C65F4E:@? H :==? @E2 7764E64@? @> :4 8C@H E9 0P 1:? @C56CE@6? 4@urage parties to the Convention to aggressively pursue GHG reduction actions. During the COP-10 opening address that with the entry into force of the Convention 10 years ago, global energy intensity has decreased gradually, and especially that the GHG emissions growth rate is lower than the GDP grow rate (p. 245).

Moreover, the Kyoto Protocol encourages the application of the Porter Hypothesis, which suggests that a well-designed environmental policy can improve both environmental and economic performance by enhancing innovation (Esty & Porter, 2001; Golub et al., 2006;

Lanoie et al., 2011; Lindmark, 2002; Manne & Richels, 1998; Porter & van der Linde, 1995).

Specifically, Porter and van der Linde (1995) makes clear about the mechanism of this hypothesis:

Ll] properly designed environmental standards can trigger innovation that may

partially or more than fully offset the costs of complying with them. Such oinnovation offsetsp, as we call them, can not only lower the net cost of meeting environmental regulations, but can even lead to absolute advantages over firms in

foreign countries not subject to similar regulations. Innovation offsets will be common because reducing pollution is often coincident with improving the

productivity with which resources are used. In short, firms can actually benefit from properly crafted environmental regulations that are more stringent (or are imposed earlier) than those faced by their competitors in other countries. By stimulating innovation, strict environmental regulations can actually enhance competitiveness.

(p. 98)

There are some evidences from empirical literatures. For example, Manne and Richels (1998) show the possibility of the validity of the Porter Hypothesis in the Kyoto Protocol. They perform two scenarios regarding CO2emission cost and observed that GDP losses in 2010 differed from those predicted by their scenarios. Their results indicate that the prospects for technical progress are incorporated, and, therefore, the costs of a carbon

constraint will be minimal. Concerning the relationship between emission trends and growth rate, Lindmark (2002) argues that sustained growth rates are associated with less

technological and structural changes relating to CO2emissions in a case study of Swedish CO2emissions. Thus, it is suggested that time-specific technological clusters might affect EKC patterns.

Based on these studies, empirical testing is conducted to verify the economic effectiveness of the Kyoto Protocol. Drawing on the assumption that the Kyoto Protocol

improves environmental performance in line with economic performance, this study posits the second hypothesis, which is, the main hypothesis of the study.

Hypothesis 2:The effect of the Kyoto Protocol on the economic performance for Annex I Parties will not be negative.

Table 4.1 summarizes the hypotheses of the effectiveness of the Kyoto Protocol. This study assumes the positive effect on the environment and the economy of Annex I Parties.

Table 4.1Hypotheses of This Chapter The Effectiveness of

the Kyoto Protocol

Environment Economy

+ +

Source: Author.

Note: + indicates a positive effect on the environments and economies of Annex I countries.