Industrial output restriction and the Kyoto protocol: An input-output approach with application to Canada

The objective of this paper is to assess the economic impacts of reducing greenhouse gas emissions by decreasing industrial output in Canada to a level that will meet the target set out in the Kyoto Protocol. The study uses an ecological-economic Input-Output model combining economic components valued in monetary terms with ecologic components - GHG emissions - expressed in physical terms. Economic and greenhouse gas emissions data for Canada are computed in the same sectoral disaggregation. Three policy scenarios are considered: the first one uses the direct emission coefficients to allocate the reduction in industrial output, while the other two use the direct plus indirect emission coefficients. In the first two scenarios, the reduction in industrial sector output is allocated uniformly across sectors while it is allocated to the 12 largest emitting industries in the last one. The estimated impacts indicate that the results vary with the different allocation methods. The third policy scenario, allocation to the 12 largest emitting sectors, is the most cost effective of the three as the impacts of the Kyoto Protocol reduces Gross Domestic Product by 3.1% compared to 24% and 8.1% in the first two scenarios. Computed economic costs should be considered as upper-bounds because the model assumes immediate adjustment to the Kyoto Protocol and because flexibility mechanisms are not incorporated. The resulting upper-bound impact of the third scenario may seem to contradict those who claim that the Kyoto Protocol would place an unbearable burden on the Canadian economy.