In light of this, let me tell you why the Kyoto Protocol is bad public policy.
The Kyoto Protocol is essentially a licensing regime of states designed to reduce emissions of specific gases. We want to reduce, or abate, emissions of the gases because they create a "greenhouse" effect that influences world temperature, and changes in world temperature could be harmful.
I am not disputing that certain gases have a greenhouse effect. Nor am I disputing that human activity adds these gases to the atmosphere. But I do want to point out that we are uncertain about many aspects of climate change, both scientific and economic.
Significantly, we are uncertain of the marginal cost and marginal benefit of abating emissions. In a very interesting article, Warwick McKibben and Peter Wilcoxen describe how the relationship between the slope of these two functions in large part determines the relative efficiency of the two basic regimes, taxes or licences (if we weren't uncertain of the relative slopes, then the two regimes are equally efficient). McKibben and Wilcoxen focus on a particular scenario, where they assume a relatively flat marginal benefit and fairly steep estimated marginal cost. They then illustrate how, if marginal cost is higher than anticipated, a licensing regime is much more inefficient than a tax. As my professor pointed out, it is the relationship between the slopes of marginal benefit and the tax that makes the tax more efficient.
This is partly why the Kyoto Protocol is bad public policy: by fixing the quantity abated, the protocol ignores the inherent uncertainty of the problem.
McKibben and Wilcoxen also discuss the political difficulty of implementing a tax on emissions, which would involve a large transfer of income from firms to governments. Eventually, they propose a domestically regulated hybrid system of long-term and short-term permits (long-term permits are tradable by firms). They claim that this policy has the advantages of a tax at the margin and is easier to implement than a tax on quantity emitted because it does not involve huge transfers of wealth between firms and government.
McKibben and Wilcoxen's proposed hybrid system has its own problems, but on first reading and after brief reflection, it seems a better policy than Kyoto. Here's the reference to their article in Journal of Economic Perspectives:
McKibben, Warwick J. and Wilcoxen, Peter J. "The Role of Economics in Climate Change Policy." Journal of Economic Perspectives. 16.2 (2002): 107-29.
This is an example of the type of issue my classmates and I discuss. Thanks to Erin Weir for helping me to better understand McKibben and Wilcoxen's assumptions.