International Emissions Trading Research Articles

Efficient CO2 Emissions Control with National Emissions Taxes and International Emissions Trading

Efficient CO2 Emissions Control with National Emissions Taxes and International Emissions Trading

Climate Change Taxes and Energy Efficiency in Japan

In 2003 Japan proposed a Climate Change Tax to reduce its CO2 emissions to the level required by the Kyoto Protocol. If implemented, the tax would be levied on fossil fuel use and the revenue distributed to encourage the purchase of energy efficient equipment. Analysis using the MIT Emissions Prediction and Policy Analysis (EPPA) model shows that this policy is unlikely to bring Japan into compliance with its Kyoto target unless the subsidy encourages improvement in energy intensity well beyond Japan’s recent historical experience. Similar demand-management programs in the US, where there has been extensive experience, have not been nearly as effective as they would need to be to achieve energy efficiency goals of the proposal. The Tax proposal also calls for limits on international emission trading. We find that this limit substantially affects costs of compliance. The welfare loss with full emissions trading is 1/6 that when Japan meets its target though domestic actions only, the carbon price is lower, and there is a smaller loss of energy-intensive exports. Japan can achieve substantial savings from emissions trading even under cases where, for example, the full amount of the Russian allowance is not available in international markets.

Burden sharing in a greenhouse: egalitarianism and sovereignty reconciled

The allocation of emission entitlements across countries is the single most controversial issue in international climate policy. Extreme positions within the policy debate range from entitlements based on current emission patterns (sovereignty) to entitlements based on equal-per-capita allocations (egalitarianism). This paper shows that gradual convergence from sovereignty towards egalitarianism could provide a pragmatic solution to the equity debate: When combined with international emissions trading, the convergence approach stands out for offering the developing countries substantial incentives for participation in the international greenhouse gas abatement effort without imposing excessive burdens on the industrialized countries.

International Emissions Trading and Induced Carbon-Saving Technological Change: Effects of Restricting the Trade in Carbon Rights

This paper examines the implications of restricting the tradability of carbon rights in the presence of induced technological change. Unlike earlier approaches aimed at exploring the tradability-technology linkage, we focus on climate-relevant “carbon-saving” technological change. This is achieved by incorporating endogenous investment in carbon productivity into the RICE-99 integrated assessment model of Nordhaus and Boyer (2000). Simulation analysis of various emission reduction scenarios with several restrictions on emissions trading reveals a pronounced dichotomy of effects across regions: Restrictions to trading raise the investments in carbon productivity in permit demanding regions while reducing them in permit supplying regions. In terms of per capita consumption, permit demanding regions lose and permit supplying regions gain from restrictions. In scenarios that involve “hot air,” restrictions to trade lower overall emissions, which results in reduced climate damage for most regions. Reduced damage, in turn, reduces the incentive to invest in carbon productivity.

Emission Trading Beyond Europe: Linking Schemes in a Post-Kyoto World

This paper assesses the economic impacts of linking the EU Emission Trading Scheme (ETS) to emerging schemes beyond Europe, in the presence of a post-Kyoto agreement in 2020. Simulations with a numerical multi-country model of the world carbon market show that linking the European ETS induces only marginal economic benefits: As trading is restricted to energy-intensive industries that are assigned generous initial emissions, the major compliance burden is carried by non-trading industries excluded from the linked ETS. In the presence of parallel government trading under a post-Kyoto Protocol, excluded sectors can however be substantially compensated by international trading at the country level, thus increasing the political attractiveness of the linking process. From an efficiency perspective, a desirable future climate policy regime represents a joint trading system that enables international emission trading between ETS companies and governments. While the Clean Development Mechanism (CDM) cannot alleviate the inefficiencies of linked ETS, in a parallel or joint trading regime the access to abatement options of developing countries induces large additional cost savings. Restricting CDM access via a supplementarity criterion does not significantly decrease the economic benefits from project-based emission crediting.

Modeling the impacts of international climate change policies in a CGE context: The use of the GTAP-E model

The anticipated implications of international environmental policy strategies are critical for the success or failure of international negotiations on climate change policies. In this paper, we discuss the complex modeling issues related to the incorporation of international environmental policy measures in one of the popular applied general equilibrium models for international trade, the so-called GTAP model. Special attention is paid to an extended version of this model addressing environmental and energy problems, viz. the GTAP-E model. Various numerical results of simulation experiments with this model at a worldwide scale will be presented. In particular, we will address the question how to include the frequently discussed instruments of International Emission Trading, Joint Implementation and Clean Development Mechanisms in a computable general equilibrium model such as the GTAP-E model.

Marginal abatement cost curves in general equilibrium: The influence of world energy prices

Marginal abatement cost curves (MACCs) are a favorite instrument to analyze international emissions trading. This paper focuses on the question of how to define MACCs in a general equilibrium context where the global abatement level influences energy prices and in turn national MACCs. We discuss the mechanisms theoretically and then use the CGE model DART for quantitative simulations. The result is, that changes in energy prices resulting from different global abatement levels do indeed affect national MACCs. Also, we compare different possibilities of defining MACCs—of which some are robust against changes in energy prices while others vary considerably.

Norm Entrapment and Preference Change: The Evolution of the European Union Position on International Emissions Trading

The European Union's position on the incorporation of emissions trading into the Kyoto Protocol presents an interesting puzzle. The EU opposed American efforts to integrate international emissions trading into the Protocol. However, after 1998 the EU gradually emerged as one of the primary innovators in developing both its internal trading program as well as the international one. How do we explain the transformation of the EU position on trading? The conflict over emissions trading was intimately tied to normative debates surrounding the appropriateness of mechanisms to achieve GHG emission reductions. The EU advocated a norm requiring states to undertake domestic policy changes as the only legitimate mechanisms to reduce domestic emissions. The United States on the other hand argued that the international response had to be guided by the principle of economic efficiency. By 1998, the European Union and most of its member states had accepted that emissions trading offered a viable mechanism to reduce the costs of achieving emission reductions. However, its prior efforts to frame international emissions trading as an illegitimate mechanism constrained the EU's ability to alter its position. It was only after the United States rejected the Kyoto Protocol that the EU was able to promote emissions trading as a legitimate strategy to meet the Kyoto target. The EU reframed the issue of emissions trading from an illegitimate American attempt to shirk domestic responsibilities into a legitimate strategy to salvage the Kyoto Protocol without American participation. This shift in framing was a necessary condition to permit the EU to establish a leading position in the development of the international emissions trading mechanism. This case study of preference change offers evidence of the important role that international normative debates and issue framing can play in international environmental policy.

Self-Enforcing Agreements and International Trade in Greenhouse Gas Emission Rights

The success of any international climate change agreement depends on abatement targets and the incentives for countries to participate. We demonstrate that international emission trading is effective in making headway on both issues despite the assumption that countries choose their permit endowments non-cooperatively. Developing countries are lured into a trading system by the prospective rents from permit sales. Developed countries benefit from the reduced cost of emission abatement. Using a calibrated representation of the global economy in seven sectors and six regions, we find that the most effective permit-trading agreements are sub-global and yield abatement at approximately twice the level achieved in a world without permit trading.

Assessing Emission Allocation in Europe: An Interactive Simulation Approach

Implementation of an EU-wide emissions trading system by means of National Allocation Plans is at the core of European environmental policy agenda. Member States are faced with the problem of allocating their national emission budgets under the EU Burden Sharing Agreement between energy-intensive sectors that are eligible for international emissions trading and the remaining segments of their economies that will be subject to complementary domestic emission regulation. The country-specific segmentation of national emission budgets between trading sectors and non-trading sectors will determine the cost efficiency of the EU emissions trading system and the gains for each Member State vis-a-vis domestic abatement policies. We present an interactive simulation model where users can specify the design of National Allocation Plans for each EU Member State and then evaluate the induced economic effects. Our numerical framework is based on marginal abatement cost curves for (emissions) trading and non-trading sectors of the EU-15 economies. Illustrative simulations highlight the importance of a coordinated design of National Allocation Plans in order to avoid substantial excess costs of regulation and drastic burden shifting between nontrading and trading sectors.

International Emission Trading and the Cost of Greenhouse Gas Emissions Mitigation and Sequestration

The deployment of carbon capture and sequestration (CC&S) technologies is greatly affected by the marginal cost of controlling carbon emissions (also the value of carbon, when emissions permits are traded). Both the severity and timing of emissions limitations and the degree to which emissions limitation obligations can be traded will affect the value of carbon and thereby the timing and magnitude of CC&S technology deployment. Emissions limits that are more stringent in the near term imply higher near-term carbon values and therefore encourage the local development and deployment of CC&S technologies.Trade in emissions obligations lowers the cost of meeting any regional or global emissions limit and so affects the rate of penetration of CC&S technologies. Trade lowers the marginal value of carbon and CC&S penetration in high cost regions and raises the marginal value of carbon and CC&S penetration in low cost regions. The net impact on the world CC&Stechnologies depends on whether their increased use in low-cost regions exceeds the reduced use in high-cost regions.In the long term, CC&S technologies must not only remove carbon but permanently sequester it. If reservoirs are not permanent, then the emissions and costs of control are merely displaced into the future. The paper presents quantitative estimates for the impacts of trade in emissions limitation obligations on the timing, magnitude, and geographic distribution of CC&S technologies and the marginal and total costs of carbon control.

Feasibility Assessment of Open-Pond Microalgal CO2 Mitigation Technology with Implementation of the Kyoto Protocol: A Case Study for Japan

Since the Kyoto conference, new frameworks for greenhouse gases (GHGs) reduction, such as the Clean Development Mechanism (CDM), Joint Implementation (JI), and International Emissions Trading (JET) have been proposed. Implementation of these emerging concepts will change the perspective for biological CO2 mitigation strategies. For example, conducting the CO2 mitigation projects in non-Annex I countries rather than in the Annex I countries will lower both capital and operating costs of CO2 mitigation projects. In addition, in some non-Annex I countries sufficient land might be available for the biological CO2 mitigation, which may not be available in land-short Annex I countries. In this study, the impact of this new framework on feasibility of microalgal CO2 mitigation technology was assessed and the feasibility of microalgal CO2 mitigation for Japan in non-Annex I countries was examined. The results showed that implementing new frameworks will improve the feasibility of open-pond microalgal CO2 mitigation systems. Even with conservative assumptions of productivity of 30 tCO2/ha/yr with no revenue from the byproducts, open-pond microalgal CO2 mitigation is competitive to alternative CO2 mitigation technologies. With some favorable assumptions, CO2 mitigation cost can be within the range of estimated international CO2 prices.

Climate change: the political situation.

Climate change: the political situation.

Systems for carbon trading: an overview

This paper focuses on the increasing number of regional, national and international systems for trading and transfer of greenhouse gas emission allowances and emission reduction credits. The paper will serve as a platform for further discussions on the development of the international carbon trading market. The analysis builds on the International Emissions Trading Association (IETA) Trading Schemes Database, which has been developed by Point Carbon, covering all known trading schemes and programs. A full overview of all existing trading schemes and proposals is presented, showing inter alia the outreach and judicial nature of the systems, the range and nature of emission reduction or credit purchase targets, allocation methods used, links to external systems, and possibilities for the use of project-based credits. A comparative assessment is performed on a number of design criteria, allowing for conclusions to be drawn on the level of harmonisation of these systems, and the identification of convergence or divergence of important operational features. The systems covered in the analysis display considerable variation when it comes to key design criteria and functionality. A rapid integration of many of the planned and active systems seems likely following the agreement on the EU emissions trading scheme, and will be further accelerated if the Kyoto Protocol is ratified.

The safety valve and climate policy

The “safety valve” is a possible addition to a cap-and-trade system of emissions regulation whereby the authority offers to sell permits in unlimited amount at a pre-set price. In this way the cost of meeting the cap can be limited. It was proposed in the US as a way to control perceived high costs of the Kyoto Protocol, and possibly as a way to shift the focus of policy from the quantity targets of the Protocol to emissions price. In international discussions, the idea emerged as a proposal for a compliance penalty. The usefulness of the safety valve depends on the conditions under which it might be introduced. For a time it might tame an overly stringent emissions target. It also can help control the price volatility during the introduction of gradually tightening one, although permit banking can ultimately serve the same function. It is unlikely to serve as a long-term feature of a cap-and-trade system, however, because of the complexity of coordinating price and quantity instruments and because it will interfere with the development of systems of international emissions trade.

International diversification of investments in climate change mitigation

Numerous studies have shown that international emissions trading can significantly lower the costs of greenhouse gas (GHG) abatement. Economic models, however, ignore the substantial economic and political risks associated with investments in developing countries, where—according to these models—a large share of global GHG abatement takes place. We use a mean-variance approach to compute international portfolios of carbon abatement activities that balance low abatement costs and investment risks. Expected returns are derived from marginal abatement cost curves. The volatility of the growth rate of regional carbon dioxide emissions is used as an indicator of investment risk. We find, first, that well-diversified portfolios can significantly reduce investment risks. Second, the least-risk portfolio is distinct from the cost-efficient allocation based on equalization of marginal abatement costs, and much more costly to implement. This indicates that existing models which neglect investment risks overestimate the cost-savings due to international emissions trading.

Great expectations: can international emissions trading deliver an equitable climate regime?

Climate change equity debates tend to focus on achieving a fair and global ‘allocation’ of emission rights among countries. Allocation proposals typically envision, if implicitly, two purposes for international emissions trading. First, trading is expected to serve as a cost-effective means of promoting compliance with emissions targets. Second, trading is posited as a means to generate financial transfers, typically from industrialized to transitioning and developing countries. This article investigates the common assumption that international emissions trading will effectively serve both of these purposes. We conclude that the two purposes might not be mutually supportive, and that efforts to use international emissions trading as a financial transfer mechanism may potentially undermine cost-effectiveness goals. International emissions trading on a global scale would create new risks in terms of both cost-effectiveness and environmental performance, some of which will be challenging to manage. In particular, uncertainties over market prices and trading eligibility, coupled with the costs of participation, may together be the Achilles heel of some allocation proposals that entail large financial transfers from industrialized to developing countries. Any proposal for an ‘equitable’ allocation of emission allowances, we conclude, must be cognizant of the risks and costs implied by a reliance on international emissions trading. We offer some suggestions to this end.

Market power and hot air in international emissions trading: the impacts of US withdrawal from the Kyoto Protocol

Ten years after the initial Climate Change Convention from Rio in 1992 the industrialized world is finally likely to ratify the Kyoto Protocol, which will impose legally binding greenhouse gas emission reductions on the developed world. However, the Kyoto Protocol will enter into force without the USA, which withdrew under President Bush in March 2001. Accounting for hot air and market power of the Former Soviet Union on emission permit markets, it is shown that US withdrawal has important consequences on environmental effectiveness, compliance costs, and excess costs of market power under the Kyoto Protocol. Non-compliance of the USA implies a dramatic decrease in environmental effectiveness as well as compliance costs of OECD countries whereas the Former Soviet Union and transitional economies in Eastern Europe suffer from a huge decline in permit sales revenues. Excess costs of market power in permit trade increase in relative terms, but decline substantially in absolute terms due to US withdrawal. Policy options are quantified to bypass the problems of hot air and market power through compensation mechanisms.

Great expectations: can international emissions trading deliver an equitable climate regime?

Climate change equity debates tend to focus on achieving a fair and global ‘allocation’ of emission rights among countries. Allocation proposals typically envision, if implicitly, two purposes for international emissions trading. First, trading is expected to serve as a cost-effective means of promoting compliance with emissions targets. Second, trading is posited as a means to generate financial transfers, typically from industrialized to transitioning and developing countries. This article investigates the common assumption that international emissions trading will effectively serve both of these purposes. We conclude that the two purposes might not be mutually supportive, and that efforts to use international emissions trading as a financial transfer mechanism may potentially undermine cost-effectiveness goals. International emissions trading on a global scale would create new risks in terms of both cost-effectiveness and environmental performance, some of which will be challenging to manage. In particular, uncertainties over market prices and trading eligibility, coupled with the costs of participation, may together be the Achilles heel of some allocation proposals that entail large financial transfers from industrialized to developing countries. Any proposal for an ‘equitable’ allocation of emission allowances, we conclude, must be cognizant of the risks and costs implied by a reliance on international emissions trading. We offer some suggestions to this end.

Forging alliance with Russia: the example of a Green Investment Scheme

Russian Kyoto related interests are economic and after the US withdrawal the mission of Russian actors has been to find new demand for Russian credits and allowances. Kyoto related benefits to Russia will be significantly smaller than earlier expected, however, the revenues are now more likely to be focused on climate change mitigation purposes. Competition in the Kyoto market has established buyers’ market and Russia has to accommodate the interests of investors in order to gain benefits. The Russian initiative ‘Green Investment Scheme’ to recycle revenues from International Emissions Trading (IET) to further environmental activities would convene demand for Russian AAUs but experience the same problems than the previous initiatives: inadequate institutional arrangement, unclear division of responsibilities between domestic actors, prolonged ratification process and lack of eligibility strategy. These problems have prevented implementation of GIS so far. Therefore, these problems have to be addressed by high-level Russian policy-makers if serious benefits from Kyoto are sought. Actors building alliances with Russia should focus on assisting with solving these problems.