Climate change policy and the economic impact of the Kyoto Protocol Darren Kennedy, Cain Polidano, Jaekyu Lim and Brian S. Fisher South Australian Office of Energy Policy ‘Opportunities Out of Kyoto: A Conference on Greenhouse Targets and the South Australian Economy’ Adelaide, 1 September 1998 ABARE CONFERENCE PAPER 98.23 1 ABARE ABARE project 1535 Ratification of the Kyoto Protocol will have major medium and long term implications for the Australian economy and for the international community. The protocol is one of the most ambitious and far reaching environmental policy initiatives ever attempted. Greenhouse gas emission abatement targets agreed to by individual countries are set out in Annex B to the protocol. The protocol includes provisions for the use of flexibility mechanisms such as joint implementation, the clean development mechanism and emissions trading to help Parties meet their target commitments. These flexibility mechanisms allow emission abatement to take place in relatively low cost locations, thereby reducing the overall costs associated with meeting emission targets. No agreement was reached in the protocol on the principles and guidelines for the operation of these schemes and further negotiations are required before they can be implemented. This paper focuses on the use of international emissions trading as a mechanism for helping to achieve the abatement commitments agreed to in the protocol. It shows that a system of internationally tradable emission quotas would not only decrease the cost of achieving abatement commitments, it would also greatly improve the effectiveness of the protocol because the extent of carbon leakage would be reduced. Reducing economic costs reduces the amount of structural change induced by abatement policies, thereby reducing the sectoral impacts.