8.7 Spillover Effects19
from Actions Taken in Annex B on Non-Annex B Countries
In a world where economies are linked by international trade and capital flows,
abatement of one economy will have welfare impacts on other abating or non-abating
economies. These impacts are called spillover effects, and include effects on
trade, carbon leakage, transfer and diffusion of environmentally sound technology,
and other issues (Figure TS.8).
As to the trade effects, the dominant finding of the effects of emission constraints
in Annex B countries on non-Annex B countries in simulation studies prior to
the Kyoto Protocol was that Annex B abatement would have a predominantly adverse
impact on non-Annex B regions. In simulations of the Kyoto Protocol, the results
are more mixed with some non-Annex B regions experiencing welfare gains and
other losses. This is mainly due to a milder target in the Kyoto simulations
than in pre-Kyoto simulations. It was also universally found that most non-Annex
B economies that suffered welfare losses under uniform independent abatement
would suffer smaller welfare losses under emissions trading.
Figure TS.8: Spillovers from domestic mitigation strategies
are the effects that these strategies have on other countries. Spillover
effects can be positive or negative and include effects on trade, carbon
leakage, transfer and diffusion of environmentally sound technology, and
A reduction in Annex B emissions will tend to result in
an increase in non-Annex B emissions reducing the environmental effectiveness
of Annex B abatement. This is called carbon leakage, and can occur
in the order of 5%-20% through a possible relocation of carbon-intensive industries
because of reduced Annex B competitiveness in the international marketplace,
lower producer prices of fossil fuels in the international market, and changes
in income due to better terms of trade.
While the SAR reported that there was a high variance in estimates of carbon
leakage from the available models, there has been some reduction in the variance
of estimates obtained in the subsequent years. However, this may largely result
from the development of new models based on reasonably similar assumptions and
data sources. Such developments do not necessarily reflect more widespread agreement
about appropriate behavioural assumptions. One robust result seems to be that
carbon leakage is an increasing function of the stringency of the abatement
strategy. This means that leakage may be a less serious problem under the Kyoto
target than under the more stringent targets considered previously. Also emission
leakage is lower under emissions trading than under independent abatement. Exemptions
for energy-intensive industries found in practice, and other factors, make the
higher model estimates for carbon leakage unlikely, but would raise aggregate
Carbon leakage may also be influenced by the assumed degree of competitiveness
in the world oil market. While most studies assume a competitive oil market,
studies considering imperfect competition find lower leakage if OPEC is able
to exercise a degree of market power over the supply of oil and therefore reduce
the fall in the international oil price. Whether or not OPEC acts as a cartel
can have a reasonably significant effect on the loss of wealth to OPEC and other
oil producers and on the level of permit prices in Annex B regions (see also
The third spillover effect mentioned above, the transfer and diffusion of environmentally
sound technology, is related to induced technical change (see Section
8.10). The transfer of environmentally sound technologies and know-how,
not included in models, may lead to lower leakage and especially on the longer
term may more than offset the leakage.
8.8 Summary of the Main Results for Kyoto Targets
The cost estimates for Annex B countries to implement the Kyoto Protocol vary
between studies and regions, and depend strongly upon the assumptions regarding
the use of the Kyoto mechanisms, and their interactions with domestic measures.
The great majority of global studies reporting and comparing these costs use
international energy-economic models. Nine of these studies suggest the following
Annex II countries21:
In the absence of emissions trading between Annex B countries22,
the majority of global studies show reductions in projected GDP of about 0.2%
to 2% in 2010 for different Annex II regions. With full emissions trading between
Annex B countries, the estimated reductions in 2010 are between 0.1% and 1.1%
of projected GDP23.
These studies encompass a wide range of assumptions. Models whose results are
reported here assume full use of emissions trading without transaction cost.
Results for cases that do not allow Annex B trading assume full domestic trading
within each region. Models do not include sinks or non-CO2 greenhouse
gases. They do not include the CDM, negative cost options, ancillary benefits,
or targeted revenue recycling.
For all regions costs are also influenced by the following factors:
- Constraints on the use of Annex B trading, high transaction costs in implementing
the mechanisms and inefficient domestic implementation could raise costs.
- Inclusion in domestic policy and measures of the no regrets possibilities,
use of the CDM, sinks, and inclusion of non-CO2 greenhouse gases,
could lower costs. Costs for individual countries can vary more widely.
The models show that the Kyoto mechanisms, are important in controlling risks
of high costs in given countries, and thus can complement domestic policy mechanisms.
Similarly, they can minimize risks of inequitable international impacts and
help to level marginal costs. The global modelling studies reported above show
national marginal costs to meet the Kyoto targets from about US$20/tC up to
US$600/tC without trading, and a range from about US$15/tC up to US$150/tC with
Annex B trading. The cost reductions from these mechanisms may depend on the
details of implementation, including the compatibility of domestic and international
mechanisms, constraints, and transaction costs.
Economies in transition: For most of these countries, GDP effects range
from negligible to a several percent increase. This reflects opportunities for
energy efficiency improvements not available to Annex II countries. Under assumptions
of drastic energy efficiency improvement and/or continuing economic recessions
in some countries, the assigned amounts may exceed projected emissions in the
first commitment period. In this case, models show increased GDP through revenues
from trading assigned amounts. However, for some economies in transition, implementing
the Kyoto Protocol will have similar impacts on GDP as for Annex II countries.
Non-Annex I countries: Emission constraints in Annex I countries have
well established, albeit varied spillover effects24
on non-Annex I countries.
- Oil-exporting, non-Annex I countries: Analyses report costs differently,
including, inter alia, reductions in projected GDP and reductions in projected
The study reporting the lowest costs shows reductions of 0.2% of projected
GDP with no emissions trading, and less than 0.05% of projected GDP with Annex
B emissions trading in 201026.
The study reporting the highest costs shows reductions of 25% of projected
oil revenues with no emissions trading, and 13% of projected oil revenues
with Annex B emissions trading in 2010. These studies do not consider policies
other than Annex B emissions trading, that could lessen the impact on non-Annex
I, oil-exporting countries, and therefore tend to overstate both the costs
to these countries and overall costs.
The effects on these countries can be further reduced by removal of subsidies
for fossil fuels, energy tax restructuring according to carbon content, increased
use of natural gas, and diversification of the economies of non-Annex I, oil-exporting
- Other non-Annex I countries: They may be adversely affected by reductions
in demand for their exports to OECD nations and by the price increase of those
carbon-intensive and other products they continue to import. These countries
may benefit from the reduction in fuel prices, increased exports of carbon-intensive
products and the transfer of environmentally sound technologies and know-how.
The net balance for a given country depends on which of these factors dominates.
Because of these complexities, the breakdown of winners and losers remains
- Carbon leakage:28
The possible relocation of some carbon-intensive industries to non-Annex I
countries and wider impacts on trade flows in response to changing prices
may lead to leakage in the order of 5-20%. Exemptions, for example for energy-intensive
industries, make the higher model estimates for carbon leakage unlikely, but
would raise aggregate costs. The transfer of environmentally sound technologies
and know-how, not included in models, may lead to lower leakage and especially
on the longer term may more than offset the leakage.