This paper surveys economic aspects of the Kyoto Protocol, the Treaty adopted
to control emissions of the greenhouse gases that contribute to climate change.
The first part focuses upon the structural aspects of the agreement, with
particular attention to the long-term conception of the Treaty and its use of
market-oriented instruments unprecedented in an international treaty of this
scope. The second part then examines the actual commitments adopted for the
first period, and the impact of US withdrawal upon the economics of these
commitments as mediated through the ‘flexible mechanisms’. It is noted that the
emerging behaviour of states under Kyoto is very different from that assumed in
economic modeling studies—countries are focusing first upon domestic action
and will resort to the mechanisms mainly as a fallback option to secure
compliance, not as a route to minimizing costs irrespective of other
considerations. This may have important implications for understanding the
practical economics of designing international market mechanisms, and for the
next steps that might be considered under Kyoto.