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Lurking in the shadows: The impact of CO2 emissions target setting on carbon pricing in the Kyoto agreement period.

Journal: Energy Economics

Date: 2023

Author: Barry Quinn, Ronan Gallagher, Timo Kuosmanen

Abstract:
This paper is a case study of the impact of CO2 emissions target setting. We empirically investigate the targets set during the Kyoto Protocol period using a convex nonparametric least squares system, quantile regressions, and a comprehensive data set of 125 countries. Our findings reveal CO2 marginal abatement costs, which: (1) are significantly higher for target setting countries; (2) increase over the sample period; (3) and are an order of magnitude greater than the prevailing emissions pricing mechanisms. The results provide insights into the consequences of policies to curb unwanted by-products in a regulated system and shed light on the price efficiency of carbon markets. Furthermore, we contribute to the debate on emission reduction standard-setting and highlight the importance of shadow price estimates when regulating market instabilities in an emission trading scheme.

Link: Google Scholar

Background and Context

The Challenge

The World Health Organization predicts 250,000 additional deaths per year from 2030-2050 due to climate change, assuming current emissions practices continue.

The Study

Research analyzes CO2 emissions data from 125 countries during the Kyoto Protocol period (2008-2012) to examine the impact of emissions target setting.

The Method

Uses convex quantile regression to estimate shadow prices and marginal abatement costs of CO2 emissions between target-setting and non-target-setting countries.

Higher Marginal Abatement Costs for Target-Setting Countries

  • Target-setting countries consistently faced higher costs to reduce emissions
  • Costs increased over time for both groups
  • By 2012, target setters faced costs of $111.07 per tonne versus $100.23 for non-target setters

Significant Gap Between Market and Shadow Prices

  • Shadow prices were significantly higher than market prices in EU-ETS
  • Suggests considerable price inefficiency in emissions markets
  • Shadow prices increased from $71.91 to $103.31 over the study period

Urban Population Impact on Environmental Efficiency

  • Target-setting countries had higher urban populations (75.83%)
  • Non-target setting countries had lower urban populations (60.32%)
  • Higher urbanization correlated with environmental efficiency challenges

Economic Scale Comparison

  • Target-setting countries had higher average GDP ($910.94B)
  • Non-target setting countries had lower average GDP ($764.05B)
  • Indicates relationship between economic development and emissions targets

Trade Intensity and Environmental Performance

  • Target-setting countries had higher trade intensity (99.64% of GDP)
  • Non-target setting countries had lower trade ratios (88.35% of GDP)
  • Suggests link between international trade exposure and emissions commitments

Contribution and Implications

  • Target-setting under the Kyoto Protocol led to higher marginal abatement costs for participating countries
  • Significant price inefficiencies exist in carbon markets, with shadow prices much higher than market prices
  • Future climate policies need to better align market prices with actual abatement costs

Data Sources

  • Marginal Abatement Costs visualization based on Table 3 from the article
  • Shadow Prices comparison based on Table 3 aggregate statistics
  • Urban Population data from Table 2 summary statistics
  • GDP comparison based on Table 2 mean values
  • Trade Intensity visualization based on Table 2 statistics