Kyoto Protocol: determining the effect of reducing greenhouse
gas emissions on economic growth.
Sem Frankenberg 10470522
Bachelor Economics and Business Specialization: Economics and Finance
June 2016
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Statement of OriginalityThis document is written by Sem Frankenberg who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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AbstractIt is nowadays widely accepted that our society’s emission of greenhouse gases (GHGs) causes global warming. Consequences of a warmer earth include: a rising sea level, harvest failure and migration. The Kyoto Protocol (KP) obliged developed nations to decrease GHG emissions. A significant reduction of emissions might affect economic growth. The protocol might have increased energy prices, decreasing business activity and thus growth. This research assesses the effect of a reduction of GHGs on economic growth. A case study for the KP is performed. Panel data regressions are executed to determine the effect of the protocol on GHGs, economic growth and investment. The results indicate that during the commitment period of the protocol, growth was 2,074% lower. Policymakers that have to meet emission targets for the recently signed Paris agreement, should take this into account. Apparently, traditional ways of reduction measures depress growth. Hence, different
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Table of contents
1. Introduction ... 5
2. Literature review ... 5
2.1 GHG reduction in general ... 6
2.2 Has Kyoto been costly? ... 9
3. Methodology ... 10
3.1 How to measure Kyoto? ... 10
3.2 Regressions ... 11
3.2.1 Greenhouse gases ... 11
3.2.2 Economic growth ... 12
3.2.3 Investment ... 13
4. Results ... 14
4.1 Summary of variables ... 14
4.2 Greenhouse gases ... 15
4.3 Economic growth ... 16
4.4 Investment ... 17
4.5 Overall results and implications ... 18
4.6 Limitations ... 18
5. Conclusion ... 20
References ... 21
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1. Introduction
Scientists agree that global warming is a pressing issue that is caused by, mainly, the emission of greenhouse gases (GHGs), CO2 in particular. Modern way of living has caused emissions to reach unprecedented levels. GHGs emitted by factories, cars and coal power plants warm the earth as heat is trapped within the planet’s atmosphere. This causes the worldwide temperature to rise. If it rises more than 2 degrees Celsius, this can have severe consequences (Jouzel & Debroise, 2014). For example, melting ice on Antarctica causes sea levels to rise, more frequent and intense storms will destroy infrastructure and drought or heavy rainfall can cause harvest failure. Developing nations are more affected than
industrialized countries (Nordhaus, 1991). Lowlands for instance, will be more vulnerable to a rising sea. According to Nordhaus, if lands become unproductive, movement of people and capital to new zones is inevitable, possibly leading to mass migration. This all in the light that the world population is projected to reach 11,2 billion in 2100, (UN, 2015) which in itself will obviously increase total emissions. It seems evident that ‘business-as-usual’ is no longer an option.
Acknowledging that current levels of emissions were unsustainable, 195 countries adopted the Paris agreement on December 12, 2015. It was not the first effort countries undertook to reduce GHGs. In accordance with the 1992 United Nations Framework Convention on Climate Change, (UNFCCC) the Kyoto Protocol (KP) was ratified in 2005. The KP was the first binding attempt to reduce worldwide emissions. Developed (Annex-I) countries agreed to reduce GHGs by 5% between 1990 and 2008-2012. Through Kyoto, countries were obliged to set a limitation at, or to reduce emissions. Each country received tradeable Assigned Amount Units (AAU’s), a per year amount of GHGs that could be legally emitted.
If the KP indeed triggered countries to reduce emissions, this might have affected economic growth. For example, Kyoto induced countries to switch away from cheap fossil fuels to more expensive renewable energy, as the latter emits fewer GHGs. Higher energy prices might depress economic activity as companies in Kyoto-countries face higher prices, while the rest of the world does not. The relation between GHGs and economic growth is crucial in the debate on global warming. If reducing GHGs does not decrease growth, countries worldwide will be extra encouraged to control GHGs. If traditional ways of emission reduction do depress growth, new policies might be better options.
In this paper, I want to assess the effect of a reduction of GHGs on economic growth. A case study for the KP is conducted, as the protocol aimed to lower emissions. First, chapter 2 evaluates the existing literature on the costs of emissions, the KP and GHG reduction. In chapter 3 is explained how this paper tries to determine the effect of the KP on emissions, economic growth and investment. Three individual panel data regressions are used. Thereafter, in chapter 4, the results and implications will be discussed. Finally, a conclusion is given in chapter 5.
2. Literature review
Chapter 2 evaluates the available literature for this research. This first section starts off with some background information, in order to put the other literature in perspective. This part investigates papers on the economic cost of emissions and briefly discusses in what ways emissions can be reduced. It ends with a short summary of the literature that will be discussed in sections 2.1-2.3. Those sections focus on papers on the economic effects of general GHG reduction first. Thereafter, literature on the particular effect of Kyoto is discussed.
GHG emissions seem to impose costs on society (Fankhauser, 1994; Tol, 2009, 2014). Tol (2009) makes use of an enumerative method that allows him to make use of the ‘physical effect’ of climate change. He exemplifies his method by explaining his way to
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estimate the costs of a future sea level rise. Countries will need to protect their land from a rising sea. Rich countries are able to do so through the construction of dikes and locks, while poor countries simply lose land. Based on engineering literature, the cost of dikeconstruction and the cost of expected land loss can be incorporated in economic models, Tol writes. In a 2014 meta-study, Tol updated his findings on the economic costs of global warming. Summarizing 21 studies, he concludes that any future temperature rise will decrease the value of worldwide production. Precisely, he estimates a 5°C temperature rise to cause a -3% to -21% decrease in global GDP, with an expectation of -6%.
The KP commits countries to implement emission-reducing measures, aiming to prevent an increase in worldwide temperature of more than 2 degrees Celsius. Manne & Richels (1990) recognize that imposing a carbon tax on polluting activities is a way to discourage the emission of CO2. Nordhaus (1991) does some suggestions for reduction policies as well. Among other things, he proposes to “reduce energy consumption” and to “shift to low-CO2 fuels”. There is no consensus on the effect of GHG reduction on the economy.
The following paragraphs give a short overview of the papers that will be discussed in sections 2.1-2.3. Those papers analyse the economic effect of both GHG reduction and the KP. For neither, a satisfying conclusion has been drawn. Some research indicates that
decreasing emissions is costly for the economy. Manne & Richels (1990) find that mandatory CO2 reduction comes at a significant cost because supply of energy is decreased, which drives up energy prices. This leads to a decrease in economic activity. Nordhaus (1991) estimates GHG reduction to impose costs on the economy as well. His argumentation is similar; a switch from cheap fossil fuels (oil) to more expensive non-fossil fuels (wind, solar), tends to decrease economic activity.
However, there might be a growth enhancing side to reduction policies as well. Fresner (1998) finds that ‘Cleaner production’ may lead to a more efficient way of handling energy and materials, which saves costs and thus increases profits for firms. Furthermore, although they emphasize that technology cannot be the only solution for global
environmental problems, Ehrlich & Holdren (1971) write that better technologies can mitigate the ‘negative effect of society on the environment’. Technology itself might stimulate economic growth, (Newell, 2010) implying that technological progress can simultaneously improve the world’s ecological condition and fuel growth. Finally, for companies that decide to endorse ‘green business’ as a business model, new opportunities arise. Kanchan, Kumar & Gupta (2015) state that green companies can reduce costs and increase profits while ‘exploiting no stakeholders.’ If this is indeed true, countries trying to decrease their emissions could (partly) do so by stimulating green businesses. Possibly, lower emissions could then be realized while enhancing growth.
Because of the uncertainty on the economic effect of reduction policies, it is also not clear what the effect of the KP on growth was. Some research suggests that the KP has imposed costs on society (Viguier, Babiker & Reilly, 2003), (Nordhaus & Boyer, 1999) through, for example, a rise in energy prices. This is in contradiction with work of Böhringer & Vogt, (2003) who state that the KP, for OECD countries, was not costly, economically. 2.1 GHG reduction in general
There is debate on what the exact economic effect of reduction policies is. One side of the spectrum is occupied by researchers that find that reducing GHGs is harmful for the
economy. Amongst those scientists are Manne & Richels (1990), who perform a cost-benefit analysis for a quota on CO2 emissions for the period 1990-2100. They investigate what would happen if a quota on total carbon emissions were set at 1.37 billion tons, which was the level of emissions in 1990. This quota is set making use of increasing taxes per ton of carbon. Their model assesses what would happen if emissions are kept at this level until
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2000, after which they are decreased to 80% in 2020. From 2020 onwards, the quota is held constant. This is supposed to be a significant reduction of emissions, to create a situation that is different from “business-as-usual”. The quota on total emissions limits the supply of energy as only a certain amount of fuel can be burnt. However, energy demand remains equal, because of which energy prices would rise around 2010. This rise would in turn depresses business activity, which is the main reason that, from 2030 onwards, about 5% of worldwide output would be lost, as global GNP potential would not be reached. Adding up all losses of subsequent years until 2100, Manne & Richels estimate the total (discounted) loss to the economy to be $3,6 trillion. However, they emphasize that research and development (R&D) might mitigate this loss, “perhaps by several trillions”. Invention of a non-carbon source of electricity might for example lower the costs of a quota on CO2 emissions.In a survey, Nordhaus (1991) tries to determine the costs for the United States of a reduction of two GHGs (CFC and CO2) and that of locking up carbon by planting extra trees. His results yield that cutting emissions is not so costly at first. However, he estimates a 50% reduction of GHGs to cost the global economy $200 billion per year. Adding up the losses until 2100 would yield a similar (discounted) total loss as found by Manne & Richels. Like them, Nordhaus also finds that more expensive energy is the most important factor that decreases the economy’s value. He stresses though that his results are uncertain due to assumptions on growth, an extrapolation of United States results to the rest of the world and the omission of market failures.
There is also research that finds ways to cut emissions while stimulating economic growth at the same time. To my knowledge, there is no literature that concludes significant limitations of GHGs in traditional ways, (emission quota, less/different use of energy) to boost the economy. All research on this topic seems to conclude that a reduction of emissions decreases growth. Nevertheless, there are papers that discuss specific ways to combine company growth with reduction measures. If emission reducing companies indeed experience higher profits because of, for example, higher efficiency, this will induce other firms to conduct business in an eco-friendly way as well. Also, new businesses will be attracted to the market. This might positively affect economic growth if additional jobs are created. Extra jobs will stimulate consumption, which can increase economic growth.
Opportunities arise for ecological-friendly firms. An increasing amount of literature is devoted to determining the effect of “green business” on company performance. Green business is a way of conducting business in which environmental externalities are taken into account. Green firms try to emit as little as possible, avoid air- and water pollution and use sustainable materials for their products. According to Nidumolu, Prahalad, & Rangaswami, (2009) firms traditionally believe that conducting business in an eco-friendly way increases costs without contributing to profits. They make three observations about managers. They think green business would put them at a disadvantage compared to competitors, they find eco-friendly equipment costly and customers are not willing to pay higher prices for green products. In their paper, they argue however that eco-friendly firms can in fact reduce costs, as they need fewer inputs for their products because of improved efficiency. Furthermore, extra revenue is created as the firm will be able to compete in new business sectors. Therefore, they conclude that “smart companies” should in fact focus on sustainability as their primary target of innovation.
This argumentation is in line with work of Kanchan, Kumar & Gupta, (2015) who find green business to be a promising sector. They mention that it can increase both firm profits and shareholder value, reduce costs and increase customer loyalty. Green firms flourish because of a ‘green sustainable competitive advantage’. Image and communication are essential for green businesses in order to establish such an advantage.
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Another method to stimulate business while contributing to a better environment is described by Fresner (1998). He discusses Cleaner production, a “preventive strategy to minimize the impact of production and products on the environment.” This strategy focuses on the reduction of waste and emissions and searches for its main sources, to optimize efficiency. Companies are encouraged to recycle, to use less environmentally harmful materials and to modify business processes. In line with Nidumolu, Prahalad, & Rangaswami, Fresner concludes that for multiple Austrian companies waste and energy were reduced significantly because of Cleaner production. Therefore allowing those firms to save costs and boost profits. In addition to this, he writes that newly developed environmental standards allowed companies to pay a lower interest rate and lower insurance fees, as banks perceived them to be less risky because of, among other things, less uncertainty concerning possible legal affairs.All these papers conclude that green business might increase profits and/or optimize efficiency. Both can lead to higher economic growth. Firstly, economic theory predicts that profits attract new companies, thus creating jobs. Assuming those new companies do not cause other firms to go bankrupt, unemployment then decreases and overall consumption increases, which positively affects growth. Secondly, because of higher efficiency, fewer material input (capital) is needed for production. Ordinary production functions state that capital is a determinant of production. Thus, ceteris paribus, using an equal amount of input, higher efficiency enables the production of more goods, consequently the economy can growth.
Next to cleaner, more efficient production, technology is another factor that can reduce emissions while stimulating growth. Ehrlich & Holdren (1971) state that in our modern day society, every human being negatively affects the environment. They formulate a simple model to express the environmental impact of a society (I):
𝐼𝐼 = 𝑃𝑃 ∗ 𝐹𝐹
Where P accounts for the population and F for the per capita impact on the environment. According to them, F can decrease because of technological breakthroughs. Such a
breakthrough could be the development of a more efficient boat engine. This would enable container ships to use less fuel, and thus emit fewer emissions, when transporting
commodities. So, technology can contribute to lower emissions. In addition to this, technology can enhance economic growth as well (Schmookler, 1966). In his influential work, Solow (1957) explains that technological change can positively affect economic growth. He incorporates it in an aggregate production function, making technology a direct determinant of growth. More recently, Newell (2010) describes general purpose
technologies (GPTs) as being able to positively affect GDP growth. He states that GPTs are technologies that are so important that they are used in sectors throughout the economy. Examples are the steam engine and the Internet (Bresnahan & Trajtenberg, 1995). Newell writes that the invention of GPTs can have a positive influence on economic growth. However, it is hard to think of a GPT during the commitment period of the KP. Smaller carbon reducing technological innovations might nevertheless have stimulated growth. Yet, governments can be reluctant to invest in emission-reduction technology. Initial costs of R&D are high, while potential government revenue only comes in the future, when the innovation turns out to be growth enhancing, thus increasing tax revenues.
So, some research finds that reduction of GHGs increases energy prices, slowing economic growth. Other papers see indirect growth opportunities for emission reduction measures. There seems to be evidence that green businesses can increase their profits because of a higher efficiency and a green competitive advantage. Higher profits will induce new firms to join the green sector, thus creating new jobs and boosting growth. Moreover, technological progress can reduce emissions and contribute to growth, simultaneously.
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Clearly, if Annex-I countries simply imposed a GHG quota on consumers and companies, this negatively affected growth. If, however, Kyoto-countries heavily subsidised green businesses in order to decrease emissions, this is likely to have boosted growth. Furthermore, if nations invested in technology to meet their Kyoto targets, this can have enhanced growth as well. The next part discusses ex-ante papers on the economic effect of the Kyoto protocol.2.2 Has Kyoto been costly?
To be able to assess the effect of the KP on economic growth, it is essential that the KP actually affected emissions in the first place. Grunewald & Martínez-Zarzoso (2009, 2016) and Iwata and Okada (2014) find evidence that the KP has led to CO2 reduction. Work of Aichele & Felbermayr (2012) suggests that the Kyoto protocol has reduced domestic emissions by 7% in committed countries, but that, due to leakage, actual overall emissions were not reduced. Still, they do conclude that the protocol has “imposed substantial costs on firms and consumers”, because they have adapt to the new situation. For instance, in order to stay competitive, some companies offshored factories to non-Kyoto countries. Offshoring can be costly for firms if they have to invest countries they would not have invested in if it were not because of Kyoto.
The literature thus suggests that the KP reduced emissions. Again making use of assumptions on energy prices, AAU trading and countries’ actual commitment to the KP, research has also been conducted to determine Kyoto’s economical effect. No ex-post economic evaluation of the KP has been performed yet, as actual Kyoto GHG data only came available in late 2015 (Shishlov, Morel & Bellassen, 2016). The existing literature on the economic effects thus has been written ex-ante, therefore only being able to state expectations and predictions.
Some papers find that KP complying countries paid a price for reducing GHG emissions. In one ex-ante study, Viguier, Babiker & Reilly (2003) assess the costs of Kyoto. Firstly, they estimate per country carbon prices. This is a cost per carbon unit, imposed on emitting agents. The carbon price is used in a general equilibrium model, which takes the EU’s common Kyoto target (8%) into account to determine overall costs. A relation between carbon prices and loss of GNP is found. The higher the carbon price imposed on agents, the higher the loss of GNP. Again the reason is an increase in energy prices, making it less profitable to conduct business, which slows growth. If all European countries had met their Kyoto-target, assuming no trading of emissions, they forecast that the total welfare cost would have been between 0,6% and 5%. Although they do not solely focus on economic growth, these welfare costs seem to indicate that the protocol negatively affected the economy. They do stress that they observe substantial differences between countries. Emission-intensity of GDP is the main cause for those inconsistencies. Obviously, carbon price effects are mitigated for less carbon-intensive economies. In the extreme case of a non-carbon emitting economy, a carbon price would have no effect on economic activity.
In contradiction to the findings of Viguier, Babiker & Reilly, an ex-ante study of Böhringer & Vogt (2003) suggests that the Kyoto protocol, for OECD countries, did not come at a great economical cost. Incorporating global trade and worldwide energy use in a general equilibrium model, they estimate that the KP did not impose large costs on developed countries. Their main argument is that the protocol does not considerably differ from business-as-usual. The KP appointed AAU’s to every country. Böhringer & Vogt claim that developing countries were appointed so many AAU’s that they had spare emission rights, ‘hot air’. As nations were allowed to sell their AAU’s to Annex-I countries, developed
countries could simply meet their Kyoto-target by buying AAU’s. As there were plenty AAU’s on the market, their price was low. Because of this hot air, compliance costs for
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Hence the ex-ante evaluations of the KP showed inconsistent projections. Some predicted that the protocol would decrease economic growth while others estimated that, because of ‘hot air’, its actual effect on the economy would be insignificant.3. Methodology
3.1 How to measure Kyoto?
The KP might have had an impact on economic growth if it forced economic agents to adapt their behaviour, compared to business-as-usual. Governments might have invested extra in the reduction of emissions, set higher taxes on polluting vehicles or stimulated green innovation through tax benefits. This way a treaty like the KP can have an impact.
In order to capture the effect of this impact on economic growth, it would be ideal if quantitative measures of the effect of the KP on agents would be available. Information on ‘Kyoto-policy’ could be used to determine if the KP affected GDP growth. For example, yearly data on which percentage of GDP governments used to comply with Kyoto would be very useful. However, this data is not available.
A second best option would be to include data on when governments started implementing Kyoto-policy. The commitment period started in 2008 and ended in 2012. This does not by definition mean that countries implemented GHG reducing policy over these years. The European Union ratified the KP in 2002, whereas the protocol itself was ratified in 2005. It could be that countries began implementing reduction programmes right after they ratified or right after the official ratification of the KP in 2005. But it seems improbable that countries voluntarily decided to implement reduction policy before the commitment period.
Voluntary early reduction of GHGs seems improbable for two reasons. Firstly, there was no incentive for politicians to implement reduction policies before 2008. Emission reduction can be costly for society (Manne & Richels, 1990). Reduction programmes can lead to lower economic growth and thus fewer jobs. Obviously, most politicians will be reluctant to implement policies that might cause loss of jobs. Even politicians that feel the need to reduce emissions will prefer not to be responsible for a higher unemployment rate. So, politicians in charge between ratification of KP and 2008 will have an incentive to
postpone emission reduction measures. Therefore, it seems likely that countries only started with reduction programmes from 2008 onwards, as, from then on, countries could be held accountable to comply with Kyoto.
A second reason makes it unlikely that early reduction measures were implemented. Policymakers might have had to invest to meet Kyoto-targets. For instance, they might have tried to reduce emissions through the stimulation of renewable energy and green
businesses. Furthermore, countries had the right to buy extra AAU’s from other nations. The amount of money needed for green stimulation and/or the purchase of extra AAU’s could either be generated through tax revenue or by the issuance of bonds. Because of
discounting, ceteris paribus, the present value of this expenditure was lower in 2008-2012 than in earlier years. Obviously, nations tried to spend as little as possible to reach their targets, making it more likely that countries started implementing policies from 2008, onwards. This line of argumentation differs from the first in that it purely is a finance argument; it has nothing to do with any economic effects of the KP. Even if the protocol’s overall economic effect is neutral and no jobs are lost, governments still invested to fulfil their Kyoto-targets.
Thus, no data is available on how much countries spent on reduction programmes and it seems unlikely that nations started implementing Kyoto measures before 2008. Therefore, in this paper, it is assumed that countries reduced GHGs because of Kyoto in the period 2008-2012. With this assumption, an attempt is made to capture the effect of the KP. Because no quantitative Kyoto-data is available, this is done making use of a dummy variable
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for the Kyoto years, which is similar to Grunewald & Martinez-Zarzoso (2016), Aichele & Felbermayr (2012) and Kumazawa & Callaghan (2012).3.2 Regressions
To begin with, an explanation is given about what regression would be performed in an ideal world. Also, arguments are given for why this regression is not feasible in reality. Thereafter, a regression is discussed to examine the effect of KP on GHGs. Finally, models are constructed to evaluate the effect of KP on economic growth and investment.
Ideally, to examine if the KP had an effect on economic growth, a panel data
regression would be performed in which economic growth would be regressed on GHGs and some control variables. Making use of such a regression, one would theoretically be able to estimate the effect of a change in the level of GHGs on economic growth. However, a simultaneous causality problem arises. The suggested panel data regression tries to determine the effect of a change in GHGs while growth of GDP is an explanatory factor of GHG emission itself (Holtz-Eakin & Selden, 1995), (Tucker, 1995), (Azomahou, Laisney & Phu Nguyen Van, 2006). The regression would therefore yield biased results. This simultaneous causality could be solved using an instrumental variable. This instrumental variable has to be strongly correlated with GHGs and should at the same time be independent of GDP growth. Such an instrumental variable is very hard to come by. Therefore, a different approach is used. This approach is threefold. First, a panel data regression is performed to examine if the KP affected GHG emission. Then a regression is performed to explore if the KP affected economic growth. Finally is a regression is done to determine if the protocol affected investment.
This last regression is executed because it is likely that the percentage of GDP used for investment is one of the determinants of economic growth. The KP might have affected this investment rate if, for instance, governments stimulated investment in infrastructure for sustainable ways of generating electricity. If the protocol influenced investment, it will thus in turn have affected economic growth. Therefore, this final regression is needed to prevent biased result. Data for all regressions are obtained from the World Bank.
3.2.1 Greenhouse gases
To evaluate the GHG reduction-effect of Kyoto, the following countries will be analysed: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States. These are all the big Annex-1 countries from the protocol. The examined period is from 1991 up to and including 2012. 23 countries and 22 years yield 506 observations. The investigated period includes the introduction, ratification and implementation of the KP. In order to isolate the effect of the KP on GHG emission the following panel data regression is performed:
GHGit= β1+ β2∗ yit+ β3∗ Crisis ∗ β4∗ Kyoto + εit (1) Where: 𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖 = 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑔𝑔 𝑔𝑔𝑔𝑔𝑜𝑜 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝑦𝑦𝑖𝑖𝑖𝑖 = 𝐺𝐺𝐺𝐺𝑃𝑃 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝐶𝐶𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝑐𝑐𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 The dependent variable of equation (1) is GHG. The
𝑦𝑦
𝑖𝑖𝑖𝑖 variable is used to account for12
examined time period falls the financial credit crisis. In this period, economic growth was significantly lower or even negative. Omitting the crisis from the regression would therefore lead to imprecise results. To account for the crisis, a dummy variable Crisis is added which takes the value 1 for the crisis years. For the base regression, like Berger & Bouman, (2013) the crisis years are defined as 2007-2009. Finally, a Kyoto dummy is added which takes the value 1 for the years 2008-2012 for the countries that ratified the KP. This includes all countries except the United States. Although Canada withdrew its ratification, it is treated as a Kyoto-country in the base regression because its withdrawal from the KP came into effect on 15 December 2012, 2 weeks before the end of the commitment period.The outcome of this regression model gives an estimation of the effect of the KP on the emission of GHGs, controlling for economic growth and the financial credit crisis. A Z-test is performed on all variables. If the coefficient of Kyoto is negative and significant, indicating that the protocol caused GHG reduction, the next step is to determine if this GHG reduction affected economic growth.
Hypothesis
The hypothesis for the first regression is that the protocol had a negative effect on GHG emissions. That is, complying countries emitted less in the Kyoto-years.
𝐺𝐺0: 𝛽𝛽4= 0
𝐺𝐺1: 𝛽𝛽4< 0
3.2.2 Economic growth
In this section an attempt is made to estimate the effect of Kyoto on GDP growth. Again, this is done using a panel data regression. The exact same countries and time span are used as for regression (1). To estimate the KP’s effect on economic growth, the following panel data regression is performed:
yit = β1+ β2∗ POPit+ β3∗ Iit+ β4∗ Crisis + β5∗ Kyoto + εit (2)
Where: 𝑦𝑦𝑖𝑖𝑖𝑖 = 𝐺𝐺𝐺𝐺𝑃𝑃 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 = 𝑝𝑝𝑜𝑜𝑝𝑝𝑜𝑜𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝐼𝐼𝑖𝑖𝑖𝑖 = 𝑖𝑖𝑔𝑔𝑣𝑣𝑔𝑔𝑜𝑜𝑔𝑔𝑑𝑑𝑔𝑔𝑔𝑔𝑔𝑔 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖𝐺𝐺𝐺𝐺𝑃𝑃 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝐶𝐶𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝑐𝑐𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔
The basis of the second regression is taken from research done by Grier & Tullock (1989). Like them, growth of population is included in model (2). As they state, ‘neoclassical growth theory’ predicts that population growth positively affects economic output. Without investing in capital, marginal productivity of labour decreases when the population growths. However, as investments in our sample were positive for every year, it seems logical that additional people will have increased production. Thus it is likely that the POP variable turns out to be positive and strongly significant. Furthermore, similar to Barro (1996), investment as a ratio of GDP is incorporated. As he writes, neoclassical growth models state that, for a closed economy, the saving rate is equivalent to the percentage of GDP used for investment. Barro mentions: “A higher saving rate raises the steady-state level of output per effective worker and thereby raises the growth rate for a given starting value of GDP”. Neoclassical growth models thus predict that higher domestic investment positively affect economic growth. Once more, the Crisis and Kyoto variables are included.
13
This regression thus estimates if the KP affected growth. Again, a Z-test is performed to analyse all parameters. If β5 turns out to be significant and negative, this implies that theprotocol had a negative impact on GDP growth. Hypothesis
The expectation is that the KP negatively affected GDP growth; countries that reduced their emissions because of Kyoto had lower economic growth because of it.
𝐺𝐺0: 𝛽𝛽5= 0
𝐺𝐺1: 𝛽𝛽5< 0 3.2.3 Investment
It is very likely that investment will turn out to affect growth in equation (2). Therefore, a third regression is set up to determine if the protocol itself affected investment. If this is the case, the effect of the protocol on growth would be over- or underestimated if its effect on investment were neglected. To assess the KP’s influence on investment, the following panel data regression is performed:
Iit= β1+ β2∗ 𝑦𝑦it+ β3∗ POPit+ β4∗ Yit−1+ β5∗ Crisis + β6∗ Kyoto + εit (3)
Where: 𝐼𝐼𝑖𝑖𝑖𝑖 = 𝑖𝑖𝑔𝑔𝑣𝑣𝑔𝑔𝑜𝑜𝑔𝑔𝑑𝑑𝑔𝑔𝑔𝑔𝑔𝑔 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖𝐺𝐺𝐺𝐺𝑃𝑃 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝑦𝑦𝑖𝑖𝑖𝑖 = 𝐺𝐺𝐺𝐺𝑃𝑃 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 = 𝑝𝑝𝑜𝑜𝑝𝑝𝑜𝑜𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑔𝑔𝑔𝑔𝑜𝑜𝑔𝑔𝑔𝑔ℎ 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝑌𝑌𝑖𝑖𝑖𝑖−1= 𝐺𝐺𝐺𝐺𝑃𝑃 𝑝𝑝𝑔𝑔𝑔𝑔 𝑐𝑐𝑔𝑔𝑝𝑝𝑖𝑖𝑔𝑔𝑔𝑔 𝑖𝑖𝑔𝑔 𝑦𝑦𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔 − 1 𝑓𝑓𝑜𝑜𝑔𝑔 𝑐𝑐𝑜𝑜𝑜𝑜𝑔𝑔𝑔𝑔𝑔𝑔𝑦𝑦 𝑖𝑖 𝐶𝐶𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝑐𝑐𝑔𝑔𝑖𝑖𝑜𝑜𝑖𝑖𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 = 𝑑𝑑𝑜𝑜𝑑𝑑𝑑𝑑𝑦𝑦 𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑔𝑔𝑣𝑣𝑣𝑣𝑔𝑔, 1 𝑖𝑖𝑓𝑓 𝑜𝑜𝑣𝑣𝑜𝑜𝑔𝑔𝑔𝑔𝑣𝑣𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 𝑓𝑓𝑔𝑔𝑣𝑣𝑣𝑣𝑜𝑜 𝑖𝑖𝑔𝑔 𝐾𝐾𝑦𝑦𝑜𝑜𝑔𝑔𝑜𝑜 𝑝𝑝𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑑𝑑, 0 𝑜𝑜𝑔𝑔ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑜𝑜𝑔𝑔 It is expected that GDP growth and population growth positively affect investment. When economic growth is expected to be high, investing becomes more rewarding. Therefore, a positive relation between growth and investment seems natural. Population growth is included because, when the population increases, a part of investment is used to invest in capital for new people (Barro, 1996). Per capita GDP’s effect on investment can be positive or negative. On the one hand, it is an indication of stability and wealth. Countries with a higher GDP per capita tend to be more stable, politically and economically. This can
stimulate investment. On the other hand, it can also be that strong growth opportunities in nations with a high GDP per capita are scarce, as the most rewarding projects have already been implemented. Then only projects with a lower pay-off would remain, making it less attractive to invest in such a nation. It is difficult to predict its effect in advance. The Crisis and Kyoto variables are included again as to be able to combine the results with regressions (1) and (2).
Hypothesis
It is expected that the Kyoto variable will have a negative effect on investment. Therefore the hypothesis is that:
𝐺𝐺0: 𝛽𝛽6= 0
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4. Results
In this part the results of the regressions are examined. First a summary of the country data is given. Secondly is discussed if, as the literature predicts, the regression output shows that the KP has induced countries to reduce emissions. Thereafter, an analysis of the second regression is given to assess if the protocol affected economic growth. Finally is investigated if the last regression shows evidence that the protocol affected investment.
4.1 Summary of variables
Before the regressions are analysed, a description of the included variables is given. Yearly data from the World Bank are used. All variables have a positive mean and show volatility. GDP growth is positive on average whereas the mean growth of GHGs is almost equal to zero. Furthermore, there are substantial differences in initial GDP per capita, as it ranges from $7.885 to $113.240. The Crisis and Kyoto dummy variables have means of 0.136 and 0.227 respectively, meaning that 13,6% of observations fall in the crisis period while 22,7% are obtained from Kyoto-years.
Table 1: Summary of variables
(1) (2) (3) (4)
VARIABLES mean sd min max
GDPgrowth (%) 2,147 2,634 -9,100 11,20 POPgrowth (%) 0,667 0,524 -1,691 2,891 GHGgrowth (%) 0,00817 4,041 -18,64 16,76 Investment (% of GDP) 22,59 3,090 12,80 36,02 GDPpercapt−1 ($) 33,559 16,406 7,885 113,240 CRISIS (07-09) 0,136 KYOTO 0,227 Number of countries: 23 Observations: 506
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4.2 Greenhouse gasesNow will be observed if the Kyoto protocol affected emissions. The hypothesis that the KP reduced emissions is tested. Table 2 shows the variable coefficients of four different regressions. The base regression (1) is CAN in crisis 07-09, indicating that Canada is treated as a Kyoto-country and that the crisis is defined as 2007-2009. CAN out crisis 08-09 thus treats Canada as a non-Kyoto country and defines the crisis as 2008-2009. Regressions (2), (3) and (4) in table 2 are investigated to test the robustness of the base regression, (1).
As expected, the results indicate that growth of GDP positively affected emission of GHGs. In this sample, higher economic growth caused emission growth to increase, which is consistent with Holtz-Eakin & Selden (1995), Tucker (1995) and Azomahou, Laisney & Phu Nguyen Van (2006). The growth variable stays significant in all regressions.
Furthermore, the coefficient of the Crisis variable complies with expectations as well. Its coefficient is always negative and significant, implying that in the crisis years GHG emissions were lower, compared to normal. When the crisis is treated as 07-08, leaving out 2009, however it is now only significant at a 0,10 level. Apparently, growth was low in 2009.
Finally, the Kyoto variable is analysed. When controlling for economic growth and the crisis, the KP seems to have reduced GHGs. The Kyoto coefficient is negative and significant at a 0,10 level for (1) and (2), showing evidence that the protocol affected emissions. Base regression (1) estimates that during Kyoto commitment, greenhouse gases were 0,81% lower. In regression (3) and (4) Kyoto becomes significant at a 0,05 level. This increase in significance is explained by the fact that in (3) and (4) 2009 is not treated as a crisis year. Because of this, the Kyoto variable picks up the crisis’ negative effect on growth. Nevertheless, all regressions estimate the Kyoto variable to be significantly negative. Therefore, the hypothesis that the protocol reduced emissions, is confirmed.
As these results are in line with the findings of Martínez-Zarzoso (2009, 2016), Iwata and Okada (2014) and Aichele and Felbermayr (2012), the case that the protocol reduced emissions is strengthened. Hence, from here on, it is assumed that the KP negatively
affected GHG emissions. It now makes sense to perform the regression on economic growth, whose results will be discussed in the next section.
Table 2: results, dependent variable: GHGgrowth (1)
(1) (2) (3) (4)
VARIABLES CAN in
crisis 07-09 CAN out crisis 07-09 CAN in crisis 07-08 CAN out crisis 07-08
GDPgrowth 0,390*** 0,391*** 0,440*** 0,443*** (0,0717) (0,0718) (0,0716) (0,0717) CRISIS -1,856*** -1,879*** -1,003* -1,025* (0,536) (0,534) (0,596) (0,596) KYOTO -0,810* -0,792* -1,151** -1,124** (0,475) (0,481) (0,466) (0,474) Constant -0,401 -0,412 -0,595** -0,617** (0,280) (0,279) (0,275) (0,274)
Standard errors in parentheses *** p<0,01, ** p<0,05, * p<0,1
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4.3 Economic growthThe first results showed some proof that the KP indeed reduced emissions. Now is analysed if this Kyoto-reduction lowered economic growth. In order to test the robustness this section’s base regression (1), the results of four regressions are again investigated.
The control variables are examined first. Firstly, as was anticipated, growth of population increased economic growth. Marginal productivity of labour remained indeed positive, perhaps because investment was always above zero as well. Furthermore, in all regressions, higher investment positively affected growth. Both population growth and investment are highly significant, which is in line with Grier & Tullock (1989) and Barro (1996), respectively. How Canada and the crisis are treated barely affects those outcomes.
The dummy for the crisis is indeed needed to control for the crisis years 2007-2009. The Crisis variable is strongly significant in (1) and (2). If the crisis had not been included in these regressions, estimates would have been biased, as the KP would have picked up the crisis’ negative effect on growth. However, when disregarding 2009 as a crisis year in (3) and (4), Crisis is no longer significant. This is again proof of the fact that in 2009 economic growth was very low.
Finally, the Kyoto dummy is evaluated. While controlling for above variables, all regressions imply that, during the years of Kyoto commitment, economic growth was significantly lower. Base regression (1) indicates that, on average, during the commitment period 2008-2012, economic growth was 2,074% lower, compared to non-Kyoto years. The treatment of Canada hardly influences this outcome. When, however, the crisis is defined as 07-08, the Kyoto coefficient’s absolute value increases. This is comparable to what
happened in section 4.2, the Kyoto variable picks up the lowering effect on growth of the year 2009. Apparently, the reduction of GHGs because of Kyoto has been costly for the economy. This outcome is similar to the conclusions of Viguier, Babiker and Reilly (2003). Table 3: results, dependent variable: GDPgrowth (2)
(1) (2) (3) (4)
VARIABLES CAN in
crisis 07-09 CAN out crisis 07-09 CAN in crisis 07-08 CAN out crisis 07-08
POPgrowth 0,807*** 0,828*** 0,757*** 0,769*** (0,219) (0,216) (0,222) (0,218) Investment 0,205*** 0,197*** 0,174*** 0,165*** (0,0364) (0,0361) (0,0376) (0,0373) CRISIS -1,686*** -1,721*** 0,0664 0,0529 (0,305) (0,305) (0,355) (0,357) KYOTO -2,074*** -2,094*** -2,693*** -2,722*** (0,258) (0,263) (0,248) (0,254) Constant -2,343*** -2,180*** -1,699** -1,533* (0,793) (0,790) (0,819) (0,816)
Standard errors in parentheses *** p<0,01, ** p<0,05, * p<0,1
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4.4 InvestmentIn this part, the outcome of the investment regression is discussed. The robustness of the results is tested in the exact same way as in the previous sections.
All four investment regressions yield similar results. The treatment of Canada and the crises does not seem to matter for this sample. The coefficients are approximately the same in all regressions. Furthermore, all variables remain significant.
GDPgrowth, POPgrowth and 𝐺𝐺𝐺𝐺𝑃𝑃𝑝𝑝𝑔𝑔𝑔𝑔𝑐𝑐𝑔𝑔𝑝𝑝𝑖𝑖−1 are all significantly positive at a 0,01
level. For growth of GDP and population, this is in line with the expectations. The fact that 𝐺𝐺𝐺𝐺𝑃𝑃𝑝𝑝𝑔𝑔𝑔𝑔𝑐𝑐𝑔𝑔𝑝𝑝𝑖𝑖−1 is positive indicates that, apparently, despite the fact that the sample only
contains industrialized countries, sufficient rewarding projects remained to attract investments.
The coefficient of the crisis is significantly positive at a 0,01 level in all four regressions as well. This seems counterintuitive. It appears logical that during a crisis, investment declines because people lose confidence in the economy. The positive Crisis coefficient indicates just the opposite, investment was higher throughout the years 2007-2009.
Kyoto’s coefficient turns out to be negative and significant in all regressions. The results thus imply a negative relationship between Kyoto and investment. Base regression (1) estimates investment to be 1,415% lower in the Kyoto commitment period. The other regressions yield similar results. The KP thus seems to have reduced investment. Possible causes are taxes on carbon or higher energy prices. Both taxes and higher prices can lower the profitability of some investment projects. Because of this investing in non-Kyoto countries becomes relatively more attractive, in turn lowering investment in Kyoto complying nations.
Table 4: results, dependent variable: Investment (3)
(1) (2) (3) (4)
VARIABLES CAN in
crisis 07-09 CAN out crisis 07-09 CAN out crisis 07-08 CAN in crisis 07-08
GDPgrowth 0,355*** 0,343*** 0,305*** 0,317***
(0,0378) (0,0376) (0,0369) (0,0371)
POPgrowth 3,535*** 3,487*** 3,506*** 3,555***
(0,245) (0,243) (0,242) (0,244)
GDPpercapt−1 3,06e-05*** 3,47e-05*** 3,50e-05*** 3,06e-05***
(9,95e-06) (9,67e-06) (9,58e-06) (9,88e-06) CRISIS 0,988*** 0,997*** 1,179*** 1,170*** KYOTO (0,274) -1,415*** (0,304) (0,271) -1,701*** (0,302) (0,295) -1,648*** (0,300) (0,297) -1,354*** (0,303) Constant 18,62*** 18,59*** 18,66*** 18,70*** (0,503) (0,490) (0,492) (0,504)
Standard errors in parentheses *** p<0,01, ** p<0,05, * p<0,1
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4.5 Overall results and implicationsCombining all results, it seems that the protocol has had a significant effect on the
investigated variables. The results imply that the KP reduced GHG emissions (1), economic growth (2) and investments (3). The overall effect of emission reduction programmes on economic growth is negative. In this section overall results are displayed. Furthermore is assessed what the implications for future policy are.
The results show evidence that Kyoto-policy, such as carbon quotas or CO2 taxes, decreased growth. Also, investments had a significant impact on economic growth.
Moreover, regression (3) clarifies that the protocol lowered investment. Thus, there is some evidence that the KP decreased growth because the protocol lowered investment. Lower investments can be caused by reduction policies that decrease the profitability of certain investments. For example, a carbon emitting company that knows that a per unit carbon tax will be implemented in the future, might be tempted to build an emitting factory in a non-Kyoto country. It is difficult to assess what other factors caused lower growth. It is however clear that countries did not succeed in reducing GHGs through growth enhancing measures only. Perhaps nations imposed quotas and stimulated green businesses, simultaneously. If the estimations are accurate, the overall balance of the protocol is that it managed to reduce emissions at the expense of economic growth.
Apparently, when cutting emissions, politicians rely on policies that reduce growth. They seem unable to invest enough in growth increasing measures to meet their reduction targets. This conclusion can have serious implications for future policy. Through the recently signed Paris agreement, the sample countries are again obliged to reduce GHG emissions. Extrapolating the results of the KP to the Paris agreement, a useful observation can be made. Namely, if the Paris agreement succeeds in reducing emissions, it might depress economic growth when policymakers decide to cut emissions in a way similar to Kyoto.
Assuming policymakers did not anticipate a negative effect on growth before Kyoto-policy was actually implemented, now that its effect on growth is clear, they should take it into account. This awareness of the growth depressing effect of certain types of GHG reduction can have two consequences. First of all, the relative net rewards of costly growth enhancing reduction measures increase, now that is clear that traditional policy lowers growth. Therefore, in order to reduce emissions, governments might, for example, focus on stimulating R&D programmes. Secondly, if politicians believe that the economic benefit of innovations is not sufficient, they are now extra induced to not meet emission targets, as economic growth will be lower when they do. This differs from the first argument in that policymakers might be prompted to decrease overall reduction measures instead of picking different measures. If policymakers decide not to meet future emission-targets, it will be more difficult to tackle global warming, due to this political unwillingness.
4.6 Limitations
The regressions indicate that the KP significantly reduced both emissions and economic growth. Those results are accurate to the extent that the assumptions on which they are based are true. In this section will be elaborated what assumptions and limitations apply to this paper.
The KP’s effect on emissions, growth and investment is an estimation of reality. It therefore has limited importance. In equation (1), (2) and (3), control variables are incorporated to improve the quality of the estimations. That is, to lower the probability of inaccurate results. However, possibly, some unknown, yet important, parameters have been omitted. For equation (1) this does not seem to be too problematic. Based on available literature, the major determinant of GHG growth is economic growth. It is nevertheless imaginable that some excluded factors would have altered the final results if they had been included. Omission of variables in regression (2) or (3) is more likely. There is a huge amount
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of literature dedicated to finding the determinants of economic growth and investment. A selection of the most important contributing factors has been made to set up equations (2) and (3). Perhaps some unknown significant variables have not been included. The conclusion that the KP decreased economic growth could have been different if these influences had been included as well.However, the most important limitation is the measurement of the KP. Estimating the effect of the protocol using a dummy variable is a rough method. More reliable results would have been obtained if Kyoto could have been expressed in a more quantitative way. The importance of implications for future policy is still limited when assuming that the regression results are a very precise indication of reality. This research has focused on the effect of the Kyoto protocol on growth. Generalizing the findings in order to predict that, for example, the Paris agreement will reduce economic growth, is risky. Such an
extrapolation is viable as long as circumstances are completely identical, which they never are. A global financial crisis occurred during the implementation period of Kyoto. In times of crises tax revenues decrease while politicians try to save jobs. It seems probable that in such a circumstance countries use a carbon tax to meet emission targets, as this increases
government revenue. Paris agreement GHG reduction could therefore well be different if its implementation period does not coincide with a crisis. Policymakers might then be tempted to stimulate innovation as to reduce emissions.
The outcomes thus have limited importance because of possible omission of variables in the regressions, the use of a dummy for Kyoto and the fact that circumstances are likely to be different when future policy is implemented.
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5. Conclusion
This study was conducted to examine the effect of the Kyoto Protocol on economic growth. It was argued that if the KP significantly reduced GHG emissions, this could have affected GDP growth in complying countries. Making use of panel data regressions, the effect of the protocol on GHG emission, economic growth and investment was estimated.
The outcomes of the regression on emissions (1) indicate that the KP indeed
significantly reduced GHGs. This is in line with the findings of Martínez-Zarzoso (2009, 2016), Iwata and Okada (2014) and Aichele and Felbermayr (2012). Assuming that the protocol reduced emissions, a regression on economic growth (2) was performed. Its results show evidence that growth was decreased during the commitment period of the KP. It is estimated that economic growth was 2,074% lower during the commitment period of the protocol. This outcome is comparable to the conclusions of Viguier, Babiker and Reilly, (2003) who also estimate that the protocol had a negative impact on the economy. Equation (2) showed investment to positively affect growth. Thus, if the protocol itself influenced investment and this effect were not taken into account, the effect of the protocol on growth would be over- or underestimated. Regression (3) estimates that investment was 1,415% lower throughout the Kyoto commitment period. Lower investment can be explained by, for instance, carbon taxes and higher energy prices. Apparently, Kyoto lowered economic growth partly because it reduced investment.
Taking in consideration the recent signing of the Paris agreement, the observed effect of the KP can have implications for future policy. Kyoto-policy turns out to negatively affect economic growth. Assuming that this was unknown to policymakers, they now have an incentive to move away from traditional ways of cutting emissions. This means that stimulating innovation and green businesses becomes more rewarding. Also, policymakers might be tempted to only moderately decrease emissions. The relative cost of traditional reduction measures has increased, now that it is clear that those measures reduce economic growth.
Those implications do however have limited importance. The regression results on which they are based can be biased, if some important variables have been omitted from the equations. Inclusion of those parameters could possibly alter the conclusions of this research. In addition to this comes the fact that it was only possible to roughly measure the KP. As no quantitative data on Kyoto-policy was available, the use of a Kyoto-dummy was the best option. More precise results could be obtained making use of quantitative data.
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Appendix I
According to the UNFCCC (1998), the Kyoto Protocol GHGs include the following gases: Carbon dioxide (C02) Methane (CH4) Nitrous oxide (N20) Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs) Sulphur hexafluoride (SF6)
