1. Anatomy of a $2 Deal, (Were we off by $369?) and What Next?
John Reilly
(Analysis with the help of many colleagues at MIT, including Mustafa Babiker, Henry Jacoby, Denny Ellerman, David Reiner)
MIT Joint Program on the Science and
Policy of Global Change
Agriculture and Forestry Modeling Forum
October 1, 2001

2. EPPA Features Recursive Dynamic Computable General Equilibrium Model
Explicit Resource Stocks Subject to Depletion
CES Family Production and Consumption Functions
Armington Trade in Goods
Technical Change/Technology Penetration
Solved Using MPSG
GTAP/IEA 4.0 data provides ability to disaggregate and is regularly updated.

3. EPPA Model Dimensions: Standard Version

4. CES Nest Structure for CO2: Coal

5. CES Nest Structure for CH4:Agriculture

6. Substitution Elasticity & Bottom-Up Costs
CES Unit Cost function
Derived demand for input
Relationship to bottom-up supply of abatement

7. Agriculture: USA

8. The Bonn Deal What if the US was in?
What are the costs and environmental implications of the Bonn Deal?
Will all the Flex Mechs work? Will they be used?
How should we interpret the Bonn deal?
Is there a sensible and responsible strategy for the US?

9. Kyoto Flaws Fixed, legally binding, short-term targets
Potentially large international financial flows
Trading reduces cost: why pay for hot air?
Precedent for accession of others?
Carbon sink fight to renegotiate targets
Handling of developing countries
CDM: cash cow, strangling bureaucracy, or more hot air?
Seeks domestic policy details ahead of Congress

10. Calculating the Numbers
EPPA model.
Multi-region CGE model with trade in all goods.
Some new features
Electricity sector revised and disaggregated
All Kyoto gases fully endogenous: CO2, CH4, N20, SF6, HFC, PFC
Wind/Solar, biomass electricity
Oil and gas resources re-evaluated
Bonn Agreement with Article 3.4 sinks
No consideration of 3.3 sinks or CDM
Assume full compliance, no limits on sales

11. Cases We Considered
Bonn with all gases, full trading, 3.4 sinks, no US
As in 1 w/o sinks
As in 1 with CO2 only
As in 1 and 3 without trading
Environmental Integrity: all gas, full trading, but no hot air, no sinks
As in 1 with US entry in 2nd commitment period (US at 93% of 1990 and 75mtc of sinks)
As in 1-5 with US joining the 1st commitment period (US as in 6).

15. Value of Permit Trade Billions of 1995$ (+ are purchases, - are sales)

17. Real Reductions Annex B participants in Bonn are 1.5% above 1990
With US Absent, Total Annex B is 16% above 1990 in 2010
13% above 2000
US alone is 19% above 2000 in 2010

18. Top Down or Bottom-Up Policy
Top-down approach~ Kyoto Protocol or something like it: I.e. permits, coordinated tax, global technology standard.
negotiation 
uniform policy instrument 
adopted in many countries 
expanded to all countries & tightened over time.
Bottom-up approach: countries act domestically ~
Some countries start, instrument choice varies 
Intn’l negotiations jawbone to limit free-riding 
Broaden and deepen involvement 
Knit together a more coordinated trading system later, if needed, a la 50 years of GATT-WTO

19. Is Bonn Top Down? Bonn is essentially non-binding.
Countries can undertake real but modest domestic actions, and fill in with JI, hot air, CDM as conscience allows, as needed.
Firm to firm international trading
-Probably not with Russia—Quota trading with non-financial “payment”
-Transition economies join EC bubble?
Bonn version of Kyoto looks like Kyoto but walks and quacks like policies and measures
-Good or bad??

20. A US Policy? Comparable start for a domestic cap and trade—2000 + 9%?
Escape Valve at $15/tce?—Price if Bonn had no hot air
Technical and financial assistance abroad for sensible projects that reduce greenhouse gas emissions in developing countries.
Avoid paying surplus for inframarginal reductions
Projects that make sense to each country without the need to negotiate rules that apply to everyone