Influences of policy measures on emissions

The Kyoto Protocol was adopted during the annual UNFCCC meeting in Kyoto in 1997. The goal of the protocol is to cover different GHGs, with a particular focus on CO2, and reduce global emissions in 2012 by 5,3% below the level of 1990. It was decided that the binding implementation would start when at least a) 55 countries had ratified the protocol, and b) the signatory countries would have an aggregated share of 55% of all global GHG emissions. Thus, the protocol finally became mandatory at international level with Russia's binding ratification in 2005. Developed countries, listed as Annex-A countries, have to bear the main burden, while emerging and developing countries were considered Annex-B countries. Annex-A countries are allowed to fulfil a part of their obligations in Annex-B countries by transferring technologies and other climate saving measures in the Clean Development Mechanism (CDM) and the Joint Implementation (JI). The expenditures for emission savings would be outsourced and made in developing countries which is, to put it neutrally, cost effective and integrates less developed countries in the market for GHG. Additionally, their manufacturing capacities will become cleaner at an early stage of their economic developing process.

From the literature from 4.1.1, the influence of diverse factors on energy use seems to be obvious and a shift from a strong correlation between energy use, emission and

economic growth to a decoupling occurs. Though the descriptive data of the studies quoted above exhibit a positive effect on emission savings after the Kyoto Protocol, most analyses focus on ratification excluding, however, the individual target achievement of the participating country. For example,in the EU, all members ratified the protocol. In an econometric analysis, a participation dummy based on ratification does not provide any information. The EU implemented the Burden-Sharing Agreement to redistribute its overall Kyoto Protocol obligations to its members, where each country has an individual reduction target.

Most literature that discuss the potential influence of international climate change obligations focus on the effect of the Kyoto Protocol ratification or its signatory;

however, while the focus in this chapter is on the political pressure and its intensity expressed in the level of achievement of a country's obligation.

Hence, an important question is what contributions have been made by factors linked to the Kyoto Protocol obligations after 1997? How can one identify policies that aim to force emission reductions (trading schemes, appliance standards) and a restructuring of economies through implementation of RES technologies? What variables drive energy use and energy efficiency and how do they have to be considered in the further empirical analysis? To identify the parameters, a literature review helps to find the factors of influence of the Kyoto Protocol and climate change policies.

Johnstone et al. (2009) propose the number of patent application as a suitable proxy for innovation. The observations in data from 1978 to 2003 show a strong influence of public policies on the development of renewable energies, with a boost in the late 1990s.

Grunewald and Martínez-Zarzoso (2009) observe a significant influence on carbon emissions through the effect of the Kyoto Protocol ratification. Further, they try to instrument the dummy variable of the Kyoto ratification with the number of Clean Development Mechanism (CDM) projects to measure the effect on pollution avoidance. The authors describe their approach to overcome a possible endogeneity problem of ratification and absolute emission level.

CDM help less developed countries to update their production capacities with help from abroad. Firms from developed countries transfer technology and help less developed countries to pollute less. In theory, the effect on emission savings is huge due to the fact that the previous plants had heavy pollution. Of course, a small share

of carbon saving projects and their emission saving potential is quantified. Under emission trading schemes, the CDM allows industrialised nations and private corporations to limit emissions reductions, to develop climate protection projects or to transfer emission reducing technologies to less developed nations and then receive credit for the calculated emissions reductions. Hence, if allowing CDM, the projects are already part of the carbon emissions and need not be counted twice. Counting the realised CDM projects may help to identify the reduction measures that are to be outsourced offshore. In some cases, unfortunately, a possible consequence of post-Kyoto policies might be nations undertaking their own climate protection efforts but forbidding corporations to take part in the CDM. Doubtless some of the efforts undertaken by corporations would have been policy measures which would have increased energy efficiency.

Jaffe and Stavins (1994) describe a problem in which markets cannot reach optimal solutions for energy efficiency, as they are hindered by the market failure of the missing price for all environmental damages which are a consequence of energy use and unusually high discount rates for consumers due to uncertainties in energy price developments.⁶⁰ Social costs will therefore not be covered by the energy prices and thus governmental policy should establish incentives and regulations to raise energy efficiency to the highest technically possible level, which would otherwise not be accomplished by the market. The identification of these influences upon energy efficiency is important in order to guide and ensure the success of policy measures and confirms the need for action; natural innovation processes and rising energy prices alone will not increase energy efficiency.⁶¹

The current analysis shall determine whether the implementation of the Kyoto Protocol in the BSA and other exogenous factors have a significant influence on the decrease in energy use. Is the pressure of international agreements large enough for policy measures to be effective?

The World Energy Council (2008) mentions the effects of strengthened efforts by almost all OECD nations after the Kyoto protocol negotiations to raise energy efficiency, but is lacking a descriptive analysis.

60 Consumers are concerned only about their own costs, not about any associated social costs of energy production or consumption such as emissions and environmental damage.

61 Electricity is a price elastic good, however, it is a logical consequence of physics, that in the short run one cannot change to a more efficient technology, but in the medium run production capacities can be partly shut down, and in consequences decrease the output.

Mazzanti and Musolesi (2009) compared long periods before and after the Kyoto negotiations and found that especially commitment decides if one country is successfully reducing its abatement: countries that had faced exogenous shocks e.g.

oil crisis, had already rebuilt their economies in or before the 1990s and thus could more easily achieve their energy reduction targets. The authors found differences between countries with regards to their success with climate change policies. This underlines the importance of a deeper analysis, since within a very homogenous group of countries such as the EU the Kyoto protocol ratification is an insufficient parameter and other, more specific, variables are able to better demonstrate the influence of individual carbon-saving obligations and its political pressure it carries.

Aichele and Felbermayr (2011) confirm the effect of decreasing carbon emission upon ratification of the Kyoto protocol. The authors analyse the overall carbon footprint of countries and determine it as being unchanged with carbon leakage due to e.g. outsourcing of production.

Grunewald and Martínes-Zarzoso (2012) use a dummy for Kyoto protocol ratification.

For those countries, which ratified the protocol, the effect on carbon emission seems to be a decrease of 24,5% in comparison to non-ratification.

The cited literature agrees that the Kyoto protocol ratification has an influence on environmental impact, but that do so other factors. These factors seem to have an influence on the intensity of energy use or carbon emissions. Uncertain is, as yet, how one should go about defining differences within a group of ratified countries. The Kyoto protocol ratification may be correlated to the level of development of an economy or the dependency on fossil fuel burns. Thus, while the effect of a ratification dummy can be measured, it does not distinguish between countries which have not achieved their individual obligation targets from those that already have. It is as yet unclear as to what extent the individual pressure itself influences the environmental impact.

If no causal relationship through energy climate change policies and individual climate change targets, e.g. BSA obligations, on energy efficiency can be confirmed and other factors such as growth or innovation potential are found to be explanatory variables, this still would not mean the collapse of international climate policy, but if other factors have a bigger influence on emission savings and energy efficiency and policy measures might be improved further. Thus, future policies might focus more on R&D support or subsidies for developing and growing industries, with energy

efficiency increasing as a side effect. If the Kyoto Protocol and its obligations have no influence on energy inputs and/or energy use is not changing, this must be seen as a warning signal that climate policy has mistaken priorities or that the established goals of global agreements are weak or too lax.

To give an answer to the various issues raised here, the rest of the chapter is organised as follows: section 4.2 focuses on the concept of energy efficiency and seeks to identify other possible factors which influence energy use besides GDP by reference to the established literature. If these influences can be identified, it will be easier to compare and evaluate different approaches. Factors which decrease the energy use and help increase energy efficiency will be identified. Section 4.3 creates an empirical model analysing panel data of 25 European countries over a thirteen-year period. Based on these considerations, theoretical aspects of the model and the results will be discussed. The conclusion in 4.4 closes with the finding that growth is not the only factor to influence energy use, but that policies have an influence, too.