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Anatomy of a $2 Deal, (Were we off by $369?) and What Next?

In this analysis, John Reilly and colleagues examine the Bonn Agreement and its environmental and financial implications. They discuss the costs, trading benefits, and potential strategy for the US, as well as the flaws of the Kyoto Protocol. The article also explores different scenarios and models for calculating the economic and environmental impact of the agreement.

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Anatomy of a $2 Deal, (Were we off by $369?) and What Next?

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  1. Anatomy of a $2 Deal,(Were we off by $369?)and What Next? John Reilly (Analysis with the help of many colleagues at MIT, including Mustafa Babiker, Henry Jacoby, Denny Ellerman, David Reiner) MIT Joint Program on the Science and Policy of Global Change Agriculture and Forestry Modeling Forum October 1, 2001

  2. Recursive Dynamic Computable General Equilibrium Model Explicit Resource Stocks Subject to Depletion CES Family Production and Consumption Functions Armington Trade in Goods Technical Change/Technology Penetration Solved Using MPSG GTAP/IEA 4.0 data provides ability to disaggregate and is regularly updated. EPPA Features

  3. EPPA Model Dimensions: Standard Version

  4. CES Nest Structure for CO2: Coal

  5. CES Nest Structure for CH4:Agriculture

  6. CES Unit Cost function Derived demand for input Relationship to bottom-up supply of abatement Substitution Elasticity & Bottom-Up Costs

  7. Agriculture: USA

  8. What if the US was in? What are the costs and environmental implications of the Bonn Deal? Will all the Flex Mechs work? Will they be used? How should we interpret the Bonn deal? Is there a sensible and responsible strategy for the US? The Bonn Deal

  9. Fixed, legally binding, short-term targets Potentially large international financial flows Trading reduces cost: why pay for hot air? Precedent for accession of others? Carbon sink fight to renegotiate targets Handling of developing countries CDM: cash cow, strangling bureaucracy, or more hot air? Seeks domestic policy details ahead of Congress Kyoto Flaws

  10. EPPA model. Multi-region CGE model with trade in all goods. Some new features Electricity sector revised and disaggregated All Kyoto gases fully endogenous: CO2, CH4, N20, SF6, HFC, PFC Wind/Solar, biomass electricity Oil and gas resources re-evaluated Bonn Agreement with Article 3.4 sinks No consideration of 3.3 sinks or CDM Assume full compliance, no limits on sales Calculating the Numbers

  11. Bonn with all gases, full trading, 3.4 sinks, no US As in 1 w/o sinks As in 1 with CO2 only As in 1 and 3 without trading Environmental Integrity: all gas, full trading, but no hot air, no sinks As in 1 with US entry in 2nd commitment period (US at 93% of 1990 and 75mtc of sinks) As in 1-5 with US joining the 1st commitment period (US as in 6). Cases We Considered

  12. Value of Permit TradeBillions of 1995$ (+ are purchases, - are sales)

  13. Annex B participants in Bonn are 1.5% above 1990 15% above 1995 9% above 2000 With US Absent, Total Annex B is 16% above 1990 in 2010 13% above 2000 US alone is 19% above 2000 in 2010 Real Reductions

  14. Top-down approach~ Kyoto Protocol or something like it: I.e. permits, coordinated tax, global technology standard. negotiation  uniform policy instrument  adopted in many countries  expanded to all countries & tightened over time. Bottom-up approach: countries act domestically ~ Some countries start, instrument choice varies  Intn’l negotiations jawbone to limit free-riding  Broaden and deepen involvement  Knit together a more coordinated trading system later, if needed, a la 50 years of GATT-WTO Top Down or Bottom-Up Policy

  15. Bonn is essentially non-binding. Countries can undertake real but modest domestic actions, and fill in with JI, hot air, CDM as conscience allows, as needed. Firm to firm international trading -Probably not with Russia—Quota trading with non-financial “payment” -Transition economies join EC bubble? Bonn version of Kyoto looks like Kyoto but walks and quacks like policies and measures -Good or bad?? Is Bonn Top Down?

  16. Comparable start for a domestic cap and trade—2000 + 9%? Escape Valve at $15/tce?—Price if Bonn had no hot air Technical and financial assistance abroad for sensible projects that reduce greenhouse gas emissions in developing countries. Avoid paying surplus for inframarginal reductions Projects that make sense to each country without the need to negotiate rules that apply to everyone A US Policy?

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