Beyond Kyoto: backstop technologies and endogenous prices on CO2 permits and fossil fuels

This paper analyses the markets for fossil fuels given that the limits the Kyoto Protocol sets on CO2 emissions from Annex B countries extend beyond 2008-2012. A forward-looking model with endogenous prices for fossil fuels is applied under different assumptions concerning the technological progress for a carbon-free backstop technology. Both the time-profile of the international permit price needed for the Kyoto Forever targets as well as the implications through reduced demand and lower producer prices for fossil fuels are calculated. The permit price has to rise at least up to 2030 in order to fulfil the emission targets. From then on the necessary permit price shows different future developments, dependent on when the backstop technology starts to replace oil. Since changes in the availability of the backstop technology shift the time-profile of the permit price, the loss of petroleum wealth for oil and gas producers varies between the scenarios, but is never more than 20%. Findings indicate that the reduction in gas revenues in OECD-Europe after the introduction of the targets amounts to a yearly loss of 0.01-0.02% of their total GNP for half a century. The reduction in oil revenues for OPEC is comparable to an annual loss of 2.9-5.4% of their GNP over a period of sixty years.