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Emission Trading with Shares and Coupons: A Laboratory Experiment

R. Andrew Muller and Stuart Mestelman

Year: 1994
Volume: Volume15
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No2-10
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Abstract:
Increasing attention is being paid to emission trading programs for the control of air and water pollution. The United States EPA has implemented a tradable emission allowance program for sulphur oxides. The EPA auction has been investigated in the laboratory by Cronshaw and Brown Kruse and by Franciosi, Isaac, Pingry and Reynolds. A somewhat different proposal has been made for controlling nitrous oxides in southern Ontario. Trade would occur in coupons (emission permits) and shares (entitlements to coupons). This paper reports a laboratory investigation of the Canadian proposal in which the experimental design developed by Cronshaw and Brown Kruse was modified to reflect the proposed Canadian institution. The results indicate dispersed but relatively stable prices, higher efficiency than obtained in related experiments modelling the EPA plan, and little arbitrage between share and coupon prices. The results could be due to differences in the market institutions or the training of subjects.



Requiem for Kyoto: An Economic Analysis of the Kyoto Protocol

William D. Nordhaus and Joseph G. Boyer

Year: 1999
Volume: Volume 20
Number: Special Issue - The Cost of the Kyoto Protocol: A Multi-Model Evaluation
DOI: 10.5547/ISSN0195-6574-EJ-Vol20-NoSI-5
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Abstract:
This paper uses the newly developed RICE-98 model to analyze the economics of the Kyoto Protocol. It analyzes versions of the Kyoto Protocol that have different approaches to trading emissions rights and compares these with efficient approaches. The major conclusions are: (a) the net global cost of the Kyoto Protocol is $716 billion in present value, (b) the United States bears almost two thirds of the global cost; and (c) the benefit-cost ratio of the Kyoto Protocol is 1/7. Additionally, the emissions strategy is highly cost-ineffective, with the global temperature reduction achieved at a cost almost 8 times the cost of a strategy which is cost-effective in terms of "where" and "when" efficiency. These conclusions assume that trading in carbon permits is allowed among the Annex I countries.



Clubs, Ceilings and CDM: Macroeconomics of Compliance with the Kyoto Protocol

Johannes Bollen, Arjen Gielen, and Hans Timmer

Year: 1999
Volume: Volume 20
Number: Special Issue - The Cost of the Kyoto Protocol: A Multi-Model Evaluation
DOI: 10.5547/ISSN0195-6574-EJ-Vol20-NoSI-8
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Abstract:
The Kyoto Protocol suggests that imposing restrictions on emission trade among Annex I countries may force domestic action in each country. The Protocol also mentions the Clean Development Mechanism (CDM) as On instrument to extend trade to countries outside Annex I. We analyze both restrictions on and extensions of permit trade among Annex I countries. We use the applied general equilibrium model WorldScan in this analysis. We show that, compared to unrestricted trade, the USA tends to gain from restrictions on emission trade while other OECD countries are likely to be harmed. We further show that restrictions probably do not prevent so-called hot air in the former Soviet Union from being used. On the contrary, restrictions tend to increase global emissions. Finally, we conclude that CDM can be an efficient option to reduce abatement costs, but certain conditions should be fulfilled to avoid severe carbon leakage.



Effects of Restrictions on International Permit Trading: The MS-MRT Model

Paul M. Bernstein, W. David Montgomery, Thomas F. Rutherford and Gui-Fang Yang

Year: 1999
Volume: Volume 20
Number: Special Issue - The Cost of the Kyoto Protocol: A Multi-Model Evaluation
DOI: 10.5547/ISSN0195-6574-EJ-Vol20-NoSI-10
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Abstract:
This paper assesses the economic impacts of carbon abatement programs proposed under the Kyoto protocol: the distribution of economic burden across countries and regions, the implications for international competitiveness, and the consequences of international permit trading. Our analysis is based on a dynamic global trade model which accounts for systematic differences in the energy efficiency of production in industrial and developing countries. Emission limits adversely affect the welfare of industrial and some developing countries, including all of the oil-exporting countries. Imports from Annex-B countries become more costly while demand for most developing country exports is reduced. Oil prices simultaneously fall, so the net impact on oil-importing developing countries is ambiguous. Energy-intensive industries have a strong economic incentive to relocate production to low-energy cost developing countries. Global trading in emission rights provides the lowest cost path to Kyoto, but it is unclear whether there are incentives for all non-Annex B countries to participate.



Market Power in International Carbon Emissions Trading: A Laboratory Test

Bjorn Carlen

Year: 2003
Volume: Volume24
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol24-No3-1
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Abstract:
The prospect that governments of one or a few large countries, or trading blocs, would engage in trading of international greenhouse gas emissions has led several policy analysts to express concerns that trade would be influenced by market power. The experiment reported here mimics a case where twelve countries, one of which is a large buyer (the mirror-image of a large seller), trade carbon emissions on an emissions exchange (a double-auction market) and where traders have quite accurate information about the underlying net demand. The findings deviate from those of the standard version of market power effects in that trade volumes and prices converge on competitive levels.



Is International Emissions Trading Always Beneficial?

Mustafa Babiker, John Reilly and Laurent Viguier

Year: 2004
Volume: Volume 25
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No2-2
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Abstract:
Economic efficiency is a major argument for international emissions trading under the Kyoto Protocol. We show that permit trading can be welfare decreasing for countries, even though private trading parties benefit. The result is a case of "immiserizing" growth in the sense of Bhagwati where the negative terms of trade and tax interaction effects wipe out the gains from trading. Simulation and welfare decomposition results based on a CGE model of the global economy show that under EU-wide trading countries that are net permit sellers generally lose, due primarily to the existence of distortionary energy taxes.



Should Developing Countries Take on Binding Commitments in a Climate Agreement? An Assessment of Gains and Uncertainty

Steffen Kallbekken and Hege Westskog

Year: 2005
Volume: Volume 26
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-2
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Abstract:
In this paper we explore whether efficiency gains obtained by developing countries participation in emission trading could offset the economic risks that would be incurred by taking on binding commitments when future emissions are uncertain. Such commitments would allow developing countries to participate in emissions trading, which has significantly lower transaction costs than the present Clean Development Mechanism (CDM). However, because future emissions cannot be known, commitments can become more costly for the developing countries than expected. Using a dynamic computable general equilibrium model, we analyse whether the efficiency gains obtained by participating in emissions trading can offset this risk. We find that the efficiency gains that can be obtained by developing countries might not be very large compared to the risks they incur. Developing countries might therefore have good reasons not to embrace binding commitments in order to participate in �cap and trade� emissions trading.



Assessing Emission Regulation in Europe: An Interactive Simulation Approach

Christoph Bohringer, Tim Hoffmann, Andreas Lange, Andreas Loschel, and Ulf Moslener

Year: 2005
Volume: Volume 26
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No4-1
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Abstract:
Reimplementation of an EU-wide emissions trading system by means ofNational Allocation Plans is at the core of the European environmental policy agenda. EU Member States must allocate their national emission budgets under the EU Burden Sharing Agreement between energy-intensive sectors that are eligible for European emissions trading and the remaining segments of their economies that will be subject to complementary domestic emission regulation. We show that such hybrid emission regulation may lead to substantial excess costs compared to a comprehensive emissions trading system covering all segments of the economy. Furthermore, the hybrid system associated with the current design of National Allocation Plans is likely to discriminate against sectors that are not part of the emissions trading scheme. The interested reader can make use of a web-based interactive simulation model in order to specify and evaluate alternative settings of the EU emissions trading system.



Burden Sharing Within a Multi-Gas Strategy

Alain Bernard, Marc Vielle and Laurent Viguier

Year: 2006
Volume: Multi-Greenhouse Gas Mitigation and Climate Policy
Number: Special Issue #3
DOI: 10.5547/ISSN0195-6574-EJ-VolSI2006-NoSI3-14
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Abstract:
The purpose of this paper is to assess and compare regional welfare costs associated with alternative multi-gas strategies for a stabilization of global greenhouse gases (GHG) emissions in the long run. Mitigation costs of non-CO2 greenhouse gases are integrated into a multi-region multi-country CGE model of the world economy. Calibrations are based on GHG emissions projections from, and marginal abatement cost curves provided by, the EMF21 working group for the six greenhouse gases. We find that the introduction of non-CO2 GHGs in the mitigation strategy reduces significantly the welfare cost of a long term emissions stabilization policy but that benefits vary across regions. We also find that the various possible rules of emission quotas allocation may have large effects on the burden sharing among regions.



Impacts of the European Emissions Trading Scheme Directive and Permit Assignment Methods on the Spanish Electricity Sector

Pedro Linares, Francisco Javier Santos, Mariano Ventosa, Luis Lapiedra

Year: 2006
Volume: Volume 27
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No1-5
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Abstract:
This paper assesses the economic impact of the European Emissions Trading Scheme Directive on the Spanish electricity sector. Although some other studies have been carried out before, our approach uses a more detailed model for the Spanish electricity sector, which provides more realistic results both for the expected price of the carbon allowance and for the evolution of electricity prices, installed power and firms� revenues in Spain. Results show that the implementation of the Directive will result in a significant increase of electricity prices, and also, due to the Spanish pricing system, in a large increase in the revenues of generating firms, unless the regulator intervenes. Results also show the different implications of different assignment methods. This is especially relevant currently given that most European countries are approving their national assignment plans for 2005-07 and have to revise them for 2008.




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