The Political and Economic Costs of a Fully Verifiable Kyoto Protocol

Until now policy makers and researchers considered the problem of uncertainty and verification to be of minor importance for the Kyoto process. However, the first studies that recently appeared on uncertainty estimation of carbon accounting reveal that uncertainties of the reported emissions on the country level are large. In an environment of such large uncertainties, verification of emission reductions must be viewed as a crucial mechanism to secure the very functioning of the Protocol. There are at least four reasons why verification is important: (1) The political cost of no-verification is potentially very high. Under no-verification in 2012 we will have little trust in our knowledge of (a) What we did, and (b) Who did what between 1990 and 2010? (2) The Kyoto Protocol requires verifiability for inter alia trade (Article 17), hence overall country emissions must be verifiable; and (3) Non-verifiable emission reduction claims could lead to misconduct, putting the entire market process in danger. The reasons for this are: Asymmetric gains from biased reporting could lead to market disintegration; Kyoto provides perverse incentives to preserve an enlarge the "shadow carbon economy"; and, Uncertainty of supply of emission reductions leads to less predictable market conditions and economic efficiency losses. (4) Scientific proof of the true environmental benefits of the Protocol is at least delayed. Since the issue of uncertainty has been ignored for a long time, the institutional basis for verification is still very weak. Currently, the institutional set-up is such that we face a situation where: there are no rules and instruments to secure verifiable emission reduction claims; and, a sufficiently strong and independent body to police uncertainties is not installed. In this paper, we provide a set of tools to strategically deal with the problem of uncertainty and verification under the Kyoto Protocol. We do this by: providing an overview of the instruments to deal with verification (no-, trend-, level-and top-down/bottom-up verification under PCA and FCA); compute costs scenarios for those instruments under various flexibility scenarios; and providing a short discussion on practical steps and crucial decisions to be made that lead to a more verifiable Protocol