11.7.3 Spillover impact on sustainable development via the Kyoto mechanisms and compensation

The Kyoto mechanisms may also result in spillover effects that offset their additionality. Gundimeda (2004) considers how the clean development mechanism (CDM) might work in India. (The CDM is considered in detail in Chapter 13.) The paper examines the effects of CDM projects involving land-use change and forestry on the livelihoods of the rural poor. It concludes that, for CDM to be sustainable and to result in sustainable development for local people, three important criteria must be met: (1) in sequestration projects, local use of forestry (as firewood, for example) should also be an integral part of the project (2) management of the common lands by the rural poor through proper design of the rules for the sustenance of user groups; and (3) ensuring that the maximum revenue from carbon sequestration is channelled to the rural poor. ‘Otherwise CDM would just result in either [carbon] leakage [e.g. through unplanned use of forestry for firewood] ... or have negative welfare implications for the poor’ (p. 329).

Kemfert (2002) considers the spillover and competitiveness effects of the Kyoto mechanisms used separately (CDM, CDM with sinks, joint implementation (JI) and emissions trading (ET)) using a general-equilibrium model – WIAGEM – with Kyoto-style action (including the USA) continuing until 2050. The study shows the full welfare effect (% difference from business as usual) in 2050, broken down into the effects of domestic action, competitiveness and spillovers. It is notable that the mechanisms have a very small impact on welfare. At most, as an outlier, there is a 0.7% increase for countries in transition (REC) for emissions trading and a 0.1% decrease for the EU-15 for joint implementation. The CDM is found to improve welfare most in developing countries. However, the model does not include induced technological change or environmental co-benefits and it assumes full employment in all countries. If the CDM is assumed to result in more technological development, a more productive use of labour or an improvement in air or water quality, then the environmental and welfare effects in non-Annex I countries will be much larger than those reported.

Böhringer and Rutherford (2004) use a CGE model to assess the implications of UNFCCC articles 4.8 and 4.9 dealing with compensation. They conclude that ‘spillover effects are an important consequence of multilateral carbon abatement policies. Emission mitigation by individual developed regions may not only significantly affect development and performance in non-abating developing countries, but may also cause large changes in the economic costs of emission abatement for other industrialized nations.’ They estimate that the US should pay OPEC and Mexico estimated compensation of 0.7 billion US$ annually to offset the adverse impacts on these regions and that the EU should pay the same amount to the US to account for the positive spillover.