Nov 7, 2002 - This dissertation was written between January 1997 and September 2002 at the. University of Groningen in the Netherlands. There are many ...
Implementing the Kyoto Mechanisms: Political Barriers and Path Dependence
Edwin Woerdman
University of Groningen, the Netherlands, 2002
Cover design by Rutger Meijer, Groningen Printed by PrintPartners Ipskamp, Enschede
RIJKSUNIVERSITEIT GRONINGEN
Implementing the Kyoto Mechanisms: Political Barriers and Path Dependence
Proefschrift
ter verkrijging van het doctoraat in de Rechtsgeleerdheid aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts in het openbaar te verdedigen op donderdag 7 november 2002 om 14:15 uur
door Edwin Woerdman geboren op 8 oktober 1970 te Utrecht
Promotores: Prof. dr. A. Nentjes Prof. dr. H.W. Tromp Beoordelingscommissie: Prof. dr. M. Herweijer Prof. dr. mr. C.J. Jepma Prof. dr. A.E. Steenge
FORWORD
This dissertation was written between January 1997 and September 2002 at the University of Groningen in the Netherlands. There are many people and organizations that have, in one way or another, contributed to my research. I would like to thank them here. My research was financed by the Netherlands Organization for Scientific Research (NWO) in the context of the Dutch National Research Programme on Global Air Pollution and Climate Change (NRP). I am grateful for their support. I also want to thank the University of Groningen and the Faculty of Law in particular for providing me with the facilities and assistance to carry out my research. Words fail to describe the contribution that Andries Nentjes, my supervisor (or: ‘promotor’), made to my research as well as to my well-being at our department. The combination of his sharp scientific reasoning, his genuine willingness to consider the potential relevance of theories that question or nuance his own, and his enormously friendly and open-minded personality make him the best supervisor a PhD candidate might wish for. He will be more than an example for me for the rest of my career, both as a scientist and as a person. A word of thanks also goes out to Hylke Tromp, who was my second supervisor and operated more on a distance, not in the last place because he got ill in the final phase of my dissertation. I want to thank him for the freedom and confidence he gave me to develop a theory of path dependence and combine political science with institutional (law and) economics to analyze the political barriers of the Kyoto Mechanisms. I wish him all the best with his recovery. Several of my colleagues at the Department of Economics and Public Finance (ECOF) of the University of Groningen helped me to solve some research problems. In particular, I want to thank Mirjam Koster, Roelof de Jong and Frans de Vries for their clear advice and sincere support. I also appreciate the useful discussions I had with other colleagues, like Oscar Couwenberg, Pierre Eijgelshoven, Teo Tuinstra, Wout
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Hendriksen, Anton Duizendstraal, Le Thi Thuy Phuong and Rob van der Laan. In addition, I had interesting conversations on politics and emissions trading with Bouwe Dijkstra, Jan-Tjeerd Boom, Zhong-Xiang Zhang and Sergej Shybaiev, former colleagues now working abroad, and with colleagues outside our department, but within our faculty, like Michiel Herweijer and Mirjam de Jong. Anneke Heins provided secretarial assistance and Julia Harvey helped to solve some translation problems. When I joined ECOF in 1997 they had to get used to a political scientist and I had to get used to being surrounded by economists and lawyers. Everything turned out well: research flourished and some of these people became more than just colleagues. Looking back, I had a great time at ECOF. I am looking forward to continue to work with them in the future as a postdoctoral research fellow both at this department in Groningen and at the Department of Economics of Twente University in Enschede. Bert Steenge of the latter university made an indirect but important contribution to my dissertation by pointing at the potential relevance of Douglass North’s work for my research and advising to develop an institutional lock-in theory. This even became the core of my book. It allowed me not only to analyze the political barriers and opportunities to implementing the Kyoto Mechanisms from a perspective that goes beyond traditional political science and transaction cost economics, but also to make some contribution to the theoretical literature on institutional evolution and path dependence. A brilliant advice. I am looking forward to co-operate with Bert Steenge, Dick Ruiter and my other new colleagues at Twente University where I will be working (in a joint appointment with the University of Groningen) for the next few years. Over the last few years, I wrote some articles together with Wytze van der Gaast from the Joint Implementation Network (JIN) in the Netherlands. This sympathetic researcher was always helpful and patient to provide me with detailed insights about the design of the (project-based) flexible instruments and about the latest climate policy developments. I would not be surprised if some more ‘joint efforts’ will follow in the future. The NRP report that I wrote together with him as well as with Catrinus Jepma on the compatibility of the Kyoto Mechanisms stimulated and even accelerated my research. I thank them both for that. I also learned a lot from Catrinus Jepma, for instance when I followed his postgraduate course on international environmental policy at the Netherlands Network of Economics (NAKE) in Utrecht.
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Some of the articles and papers that I have written (and that formed the basis for various chapters of this dissertation) were reviewed by excellent and internationally renowned researchers and policy-makers. In particular, I am much indebted to Erik Haites, Axel Michaelowa, Ger Klaassen and René Kemp for their valuable comments. I also thank Jos Delbeke, Peter Zapfel and Matti Vainio from the European Commission for their critical remarks and instructive discussions. I am particularly indebted to Peter Vis from the Commission for helping me to find the relevant officials for my empirical analysis on the EU supplementarity proposal. His comments on a draft paper helped me to nuance some of my findings. I would also like to thank the anonymous officials both from the European Commission and from the environmental ministries of (almost) all EU Member States, as well as Switzerland, for having taken the effort to fill out my questionnaire on a short notice back in 2000. These respondents made an indispensable contribution to my research. Of course, my opinions and conclusions as expressed in the dissertation do not necessarily correspond with their views and positions. And any errors are my own. There are some people that were not directly involved in my specific research in Groningen, but that had a substantial influence on how I look at politics in general. I would like to thank Ad van Deemen, my kind-hearted and clever thesis supervisor when I was still studying political science at the University of Nijmegen, who taught me all about game theory and other economic approaches to politics in the first half of the nineties with much enthusiasm. I also thank Jan van Deth, my first employer (before I started to write this dissertation), who gave me the chance to write my first introduction in political science (for the Open University that I wrote together with him) and develop my writing skills under his excellent supervision. He trained me in the analysis and relevance of political culture and his message is present, not only in my second introduction in political science (that I wrote for Wolters-Noordhoff without any coauthors), but also in this dissertation. Here, in this foreword, I get the chance to do something I wanted to do for a long time: I would like to thank Jan Verschoor, my bright and wonderful history teacher when I went to grammar school (gymnasium), called the ‘Marianum’, in Groenlo. His dedication and analytical expertise in the study of political (and economic) history are still an example to me. I was interested in politics and he surely stimulated me to
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develop this interest further – in a much more balanced and accurate way than I did myself at that time. Also many other tallented teachers in that period deserve some credit: my years at the Marianum were some of the best of my life. I am also fortunate to have so many wonderful friends – for whom, I must admit, I had so little time when I was writing my dissertation. They knew and respected that my dissertation was much more to me than just a way of getting a PhD degree. I appreciate their understanding and the laughs we shared when we did spend time together. In particular, I would like to thank (in alphabetic order) Adelbert & Marike, Amy & Hüseyin, Arch & Sandra, Casper & Isabelle, Charon, Douwe & Manon, Elbert & Fraukje, Erik & Janneke, Frits & Jeannet, Judith & Richard, Madieke & Erik, Marc & Ciska, Mirjam & Koos, Roelof & Carin, Ronald & Rachel and Rüdiger & Linel. Also a big hug to all of their kids. My band Disabuse has a special place in my heart. We are together for more than 15 years and we have experienced many changes, both in the music scene and in our lifes. The band was always a pleasant release for me in times of stress – and sometimes a source of stress itself. Nevertheless, I hope that we will play for many years to come: nothing can beat the feeling of driving to a show and making ‘noise’ on stage together with Arch, Ronny, Jeroen, Patrick and Wouter. Where would I be without my family? I am lucky to have close relationships with all of them. I want to thank Oma Smith, Anneke, Hans, Remco and Rolien as well as Clara, Gerard and Harald. They were always there for me and they will be so proud of this book and my PhD title. A special word of thanks goes out to my sister Suzan, as well as to her husband Pascal. We had so much fun when we were little and when we grew up: nothing but good memories – too many to mention here. If I can dedicate this book to anyone, it must be to my parents, Lammy and Gerard. They were the ones who stimulated my interest in politics and the environment in the first place – at a very early age. I get a warm feeling inside when I think about the beautiful time we spent, for instance drinking tea at home, walking through forests and camping in France and Switzerland. They encouraged me to work hard and to be a critical thinker. I hope that, one day, I will be able to raise my child(ren) in the same loving and stimulating way as they did. I had a wonderful youth. They are the best parents of the world.
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Millions of kisses are for my girlfriend Jacqueline. We are together for many happy (and busy) years. She can make me laugh like no-one else can and her down-toearth attitude has helped me more than once in making what I perceived as being complex decisions. Her amiable and joyful character makes the simplest things in life become fun and makes the beautiful things in life become monumental. I am also grateful that she tolerated my perfectionism when I spent (too) many evenings and weekends writing and rewriting this book. She is my ‘true love’. Lasswell (1963: 11-12), a famous political scientist, once wrote that ‘(…) the doctoral dissertation is the only substantial piece of research or writing that many political scientists complete during their entire career, and this is not unusual’. Two things come to my mind when reading this citation. First, it is my job to produce more research and writings as a senior researcher (‘postdoc’) in Groningen and Enschede. Second, being a political scientist that has walked the path of (law and) economics, I can only hope that my fellow scientists will find this dissertation, as well as future articles or books that I will write, ‘substantial’ enough, as Lasswell says, to build upon – or criticize. I wish the reader both fun, curiosity and concentration when going through (parts of) my dissertation. I hope that he or she will approach this book with a critical but honest view and that it will stimulate discussion. I kindly invite the reader to contact me if he or she sees possibilities or reasons to sharpen, nuance or change my insights. Science is never finished. Edwin Woerdman Groningen / Winterswijk, the Netherlands, August 2002
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CONTENTS
Foreword
i
Contents
vii
1
Introduction
1.1
Introduction 1
1.2
Property Rights, Public Goods and the Kyoto Mechanisms 7
1.3
Competitive Advantages of the Kyoto Mechanisms
1.4
Design and Implementation of the Kyoto Mechanisms
9 14
1.4.1 Private sector participation under JI and the CDM 15 1.4.2 Private sector participation under IET
20
1.4.3 The emerging international carbon trading market 1.5
27
Economic versus Political Hierarchy of the Kyoto Mechanisms? 1.5.1 The theoretical superiority of permit trading in economics
30 31
1.5.2 The problematic acceptability of permit trading in politics 35 1.6
Objective and Approach of the Book
40
1.6.1 Political barriers, opportunities and acceptability 41 1.6.2 Institutional economics, law and economics and political science 1.7
Overview of the Book
PART I
44
48
THEORETICAL FRAMEWORK
2
Political Barrier Model and Institutional Lock-In Theory
2.1
Introduction 57
vii
Contents
2.2
Political Barrier Model 59
2.3
Institutional Lock-In Theory 62
2.4
Political Barriers: Conditions for Institutional ‘Lock-In’ 2.4.1
64
The superior alternative, imperfect markets and incomplete information
66
2.4.2 Self-reinforcing mechanisms, positive feedbacks and set-up costs 69 2.4.3 Necessary and sufficient conditions for an institutional ‘lock-in’ 85 2.5
Political Opportunities: Conditions for Institutional ‘Break-Out’
90
2.5.1 Information, problem-solving and (ir)reversible self-reinforcement 2.5.2 Switching costs, legal compatibilities and societal change
91
95
2.5.3 Necessary and sufficient conditions for an institutional ‘break-out’ 98 2.5.4 Path dependence, evitability and remediability 101 2.6
Foundations and Novelties of Institutional Lock-In Theory
102
2.6.1 The superiority of the superior alternative contested 102 2.6.2 Institutional lock-in theory: a new approach? 2.7
103
Conclusion 105
PART II
INSTITUTIONAL BARRIERS AND OPPORTUNITIES
3
Environmental Effectiveness of the Kyoto Mechanisms
3.1
Introduction 111
3.2
Definitions of Environmental Effectiveness and Emission Baseline 113
3.3
Environmental Effectiveness of JI and the CDM 3.3.1 Micro-baseline, free-riding and gaming
115
3.3.2 Ex post corrections of the micro-baseline 3.3.3 Standardization of the micro-baseline 3.4
Environmental Effectiveness of IET
114 121
124
130
3.4.1 Macro-baseline, hot air and uncertainty
131
3.4.2 Dynamic versus static perspectives on the macro-baseline 135 3.4.3 Options to limit hot air trading 139
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Contents
3.5
Non-Compliance and Liability under the Kyoto Mechanisms 145 3.5.1 Non-compliance procedures 3.5.2 Liability options
145
148
3.6
Conclusion 154
4
Institutions and Cost-Effectiveness of the Kyoto Mechanisms
4.1
Introduction 159
4.2
Definitions of Cost-Effectiveness and Institutional Arrangements 161
4.3
Cost-Effectiveness of AIJ
162
4.3.1 Costs per unit of emission reduction in the AIJ pilot phase
164
4.3.2 Representativity and limitations of the empirical analysis 173 4.4
Cost-Effectiveness of JI and the CDM 178 4.4.1 Banking, sinks and low-cost options under JI
178
4.4.2 Banking, sinks and low-cost options under the CDM 4.5
Cost-Effectiveness of IET
185
190
4.5.1 Cost-effectiveness and domestic permit trading design options 190 4.5.2 Downstream permit trading with upstream monitoring 4.6
196
Cost-Effectiveness and Market Prices 200 4.6.1 An overview of market price studies
202
4.6.2 When will market prices rise or fall?
206
4.7
Conclusion 209
5
Transaction Costs of the Kyoto Mechanisms
5.1
Introduction 215
5.2
Definition of Transaction Costs
5.3
Transaction Costs of JI and the CDM 221
218
5.3.1 Baseline standardization, capacity-building and multilateral funds 221 5.3.2 Empirical evidence of transaction costs in AIJ projects 226 5.4
Transaction Costs of IET 228
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Contents
5.4.1 Incremental design, set-up costs and thin markets 229 5.4.2 Empirical evidence of transaction costs in permit trading markets 5.5
236
Methodological Problems of Comparing Transaction Costs 237 5.5.1
Comparing AIJ transaction costs with permit trading transaction costs
237
5.5.2 Comparing market transaction costs with political transaction costs 240 5.6
Conclusion 244
PART III
LEGAL BARRIERS AND OPPORTUNITIES
6
WTO Law and Competitive Distortions of the Kyoto Mechanisms
6.1
Introduction 249
6.2
Definition of Competitive Distortions
6.3
Economic Analysis of Permit Allocation and Competitive Distortions
253
6.3.1 Perfect competition, efficiency and opportunity costs
255
255
6.3.2 Imperfect competition, inefficiency and financial positions 257 6.3.3 Fair competition, equity and level playing field 260 6.4
Legal Analysis of Permit Allocation and WTO Subsidies Law
264
6.4.1 Permit allocation and actionable subsidies 266 6.4.2 Permit allocation and non-actionable subsidies 270 6.5
Political Analysis of Perceptions on Subsidization 273 6.5.1 Perceptions in political decisions on permit allocation 274 6.5.2 International harmonization of permit allocation rules 277
6.6
Conclusion 281
7
EC Law and Competitive Distortions of the Kyoto Mechanisms
7.1
Introduction 287
7.2
Economic Analysis of Permit Allocation and Competitive Distortions
x
291
Contents
7.2.1 Competitive distortions, efficiency and opportunity costs 292 7.2.2 Competitive distortions, equity and level playing field 293 7.3
Legal Analysis of Permit Allocation and EC State Aid Law 295 7.3.1 Permit allocation and state aid criteria 298 7.3.2 Permit allocation and state aid exemptions 301
7.4
Political Analysis of Perceptions on State Aid 308 7.4.1 Perceptions in political decisions on permit allocation 309 7.4.2 The political precedent of carbon trading in Denmark and the UK 316
7.5
Possible Extensions and Limitations of the Analysis 321
7.6
Conclusion 325
PART IV
CULTURAL BARRIERS AND OPPORTUNITIES
Chapter 8
Theoretical Aspects of Restricting the Kyoto Mechanisms
8.1
Introduction 333
8.2
Definition of Supplementarity
8.3
Economic Analyses of the EU Proposal on Supplementarity 339
337
8.3.1 Overall economic effects of the EU proposal on supplementarity 340 8.3.2 Gainers and loosers of the EU proposal on supplementarity 342 8.4
Theoretical Explanations of the EU Proposal on Supplementarity 349 8.4.1 Hypotheses on limiting the use of the Kyoto Mechanisms 350 8.4.2 Alternative hypotheses and limitations of the theoretical analysis 385 8.4.3 Ex post clustering of the hypotheses and equity 386
8.5
Conclusion 390
9
Empirical Aspects of Restricting the Kyoto Mechanisms
9.1
Introduction 397
9.2
Representativity and Limitations of the Empirical Analysis 401
xi
Contents
9.3
Empirical Analysis of the EU Proposal on Supplementarity 405 9.3.1 Content analysis of EU documents
409
9.3.2 Hypothesis testing among key EU officials
420
9.3.3 Analysis of questions on supplementarity among key EU officials 9.4
Bargaining Power, Issue Linkages and Two-Level Games
434
439
9.4.1 Bargaining behaviour of the EU at CoP6 Part I 440 9.4.2 Bargaining behaviour of the EU at CoP6 Part II 443 9.5
Indications of Cultural Change?
449
9.5.1 Cultural change, external ‘shocks’ and learning 450 9.5.2 Cultural change, political barriers and the recurrence of equity 454 9.6
Conclusion 458
10
Conclusion
10.1
Scientific and Policy Relevance
10.2
Political Barriers and Path Dependence
10.3
Institutional Barriers and Opportunities 478
10.4
Legal Barriers and Opportunities 488
10.5
Cultural Barriers and Opportunities 495
10.6
Future Climate Policy 501
10.7
Future Research Agenda
Appendix (Questionnaire) References
523
Samenvatting
583
Curriculum Vitae
xii
593
504
509
469 474
