Is the Kyoto Protocol good for the environment? A general equilibrium consideration of global carbon leakage

This paper explores the possibility of global carbon leakage under the Kyoto Protocol on climate change despite international political efforts to curb emissions. The paper formulates a two-country (developed North and developing South), two-input (emissions and labour), two-sector (clean and dirty) general equilibrium model to investigate: (1) the impact of tightening a Northern emissions constraint in the presence of an unconstrained South; and (2) the effect of allowing the South to introduce emission credits. The paper demonstrates that: (1) When less than 100% of the world faces an emissions constraint, carbon leakage contributes to a net increase in global emissions; and (2) Allowing the unconstrained South to generate and sell credits for use by the constrained North has an incrementally ambiguous carbon leakage effect. These results suggest that the Kyoto Protocol may generate a perverse environmental result, which is contrary to the intent of its drafters.