Analyzing the economic cost of the Kyoto protocol

This paper examines the cost of meeting the Kyoto Protocol commitments under alternative assumptions regarding technology and technical change. Real GDP is modeled as a function of the capital, labor, and energy inputs. The analysis is based on data for 23 Annex 1 countries from 1965 to 1999. Two important results emerge. First, the standard assumption of Hicks neutral technical change and time and scale independent output elasticities is not supported by the data. Second, when technical change is allowed to be biased in favor of the energy and capital inputs, and when the output elasticities vary with the level of factor use and over time, the loss in real GDP due to the Kyoto commitments rises substantially. On average, the loss in real GDP is one and a half times higher than obtained under the standard assumptions.