Theoretical and empirical analysis of the environmental impact of Kyoto Protocol

This thesis presents both a theoretical and empirical investigation of impact and environmental efficacy of the Kyoto Protocol on climate change. On the theoretical side, the thesis presents a simple four-sector North-South-OPEC model of the world economy where the use of fossil fuel creates greenhouse gas emissions. The model suggests that caps on emissions in industrialized countries lead to reduction of dirty good production in these "clean" countries, but this reduction is picked up on a one-for-one basis by the increase in dirty good production in "dirty" developing countries. Since there is less fuel saving in "dirty" developing countries, an increase in fossil fuel demand from South and OPEC is higher than its decline in the North. Therefore, world emissions rise. An implication of the theoretical model is that if a country does not ratify Kyoto Protocol or fails to meet its commitments, the emission cap does not fall so far and increase in world emissions is mitigated. The Kyoto Protocol also includes a Clean Development mechanism which allows firms in developed countries to purchase emission credits from firms in developing countries if the latter engage in emission reduction activities. The investigation of the impact of the CDM indicates that global emissions will rise if developed countries initially consume a sufficiently large share of world fossil fuel. Finally, increases in OPEC's price of fossil fuel reduce world emissions.; Our empirical investigation aims to answer three questions. First, are there clean and dirty countries in the sense that rich developed countries adopt production techniques with lower CO2 emissions per unit of output? Second, do countries reduce emissions per unit of output of fuel-using goods by direct abatement or indirectly by adopting fuel saving technologies or a combination of the two? Third, what is the direction and magnitude of relocation of emission-intensive activities between developed and developing countries? To shed light on these issues, we estimate the so-called Environmental Kuznets Curve (EKC) regressions. We focus on a four-sector decomposition of GDP into agriculture, manufacturing, other industry and services. We work primarily with a balanced panel which consists of 71 countries, 24 years and 1704 observations. For conventional Kuznets curve regressions with no controls on the output composition of the economy, we find that, as we move to countries with higher per capita GDP, per capita emissions increase at a decreasing rate and eventually decline. The theoretical model predicts that richer countries also invest more heavily in fuel saving technologies leading to lower emissions per unit of output. Consequently, even with controls on the output composition of the economy, per capita emissions will continue to increase at a decreasing rate as per capita GDP rises because rich countries undertake more fuel saving. The empirical evidence strongly confirms this prediction. Both the magnitude of the estimated elasticities and their statistical significance provide suggestive evidence that fuel saving has been more important than direct abatement, at least to this point in time. Finally, our simulations suggests that due to surprising emission intensity reversals, both the Annex and non-Annex countries tend to expand their relatively clean sectors and contract their relatively dirty sectors in response to the Kyoto agreement meeting emission reduction targets. Consequently, in contrast to the theoretical model, world emissions fall in response to tighter emission caps in developed countries.