Ancillary Benefits of Carbon Mitigation: How Does it Affect Cost Effectiveness of the Annex-1 Emissions Trading?

Abstract

This paper explores how ancillary benefits of carbon mitigation may affect the cost effectiveness of Annex-1 emissions trading. We find that emissions trading could lead to cost-savings for both the Annex-1 countries as a whole and for the individual countries, as compared with the case of no-trading. The sum of the compliance costs is minimized under the cost-effective condition where marginal costs of domestic abatement are equalized across the Annex-1 countries. However, such a condition of cost effectiveness in emissions trading does not imply cost effectiveness in terms of the compliance of individual countries. The buyers of emission allowances, consisting of the European Union, the United States and Japan, could have even lower costs of compliance in the trading case where the ancillary benefits are taken into consideration. This result supports the intervention that takes account of the ancillary benefit in designing national carbon mitigation policies. To achieve the cost effectiveness in national carbon abatement, there should be regulatory interventions so that the price of carbon emission allowances can reflect the ancillary benefits.