Evaluating the Bonn Agreement and some key issues

Abstract

We break the COP 6 process down into three major steps: the pre-COP 6 version of the Kyoto Protocol, the US withdrawal and the Bonn Agreement. The evaluation shows that the Bonn Agreement leads to a reduction of 130 MtC, compared to the 755 MtC in the pre-COP 6 version of the Kyoto Protocol. Annex I emissions without the US will come out just below the 1990 level. The US withdrawal has by far the greatest impact in reducing the environmental effectiveness of the Kyoto Protocol. Compared to the US non-participation, the Bonn decisions on sinks may be considered an acceptable price to get a political agreement. We further conclude that hot air becomes increasingly dominant and may threaten the viability of the Kyoto Mechanisms. As prices are pushed downwards and even approach zero, it would be in the seller's interest (FSU) to exercise market power. We examine market power through volume and price controls and find that banking 50 per cent of FSU hot air improves the environmental effectiveness and generates positive financial benefits for both the FSU and the non-Annex I countries. A voluntary EU target of 50 per cent domestic action would wipe out any emissions market potential and should not be considered without curtailing permit supply. Ultimately, the most promising strategy to enhance the Kyoto Protocol is to seek options for US re-entry. Although the Bonn Agreement leaves the door open for US re-entry, this is largely determined by the domestic political environment.