The Costs of Compliance: A CGE Assessment of Canada's Policy Options under the Kyoto Protocol

Canada has committed itself under the Kyoto Protocol to reduce greenhouse gas emissions between 2008 and 2012 on average by six per cent from the base 1990 level. As of 2009, however, Canada's greenhouse gas emissions are far above its 1990 level which calls for stringent short-term policy measures if Canada is to meet its legally binding commitment. This paper uses a multi-region, multi-commodity static general equilibrium model to quantify the economic impacts of alternative compliance strategies for Canada in the context of climate policies undertaken by other Kyoto parties. The numerical results confirm fears by Canadian policymakers of substantial economic adjustment costs should Canada fulfill its Kyoto commitments solely through domestic action. However, a rigorous use of the project-based CDM on top of international emissions trading could allow Canada to live up to its international climate policy commitment at politically much more tolerable costs.