PowerPointPrsentation

1
Christoph Böhringera,b and Ulf Moslenera aZEW
Mannheim and bUniversity of Heidelberg
St. Petersburg, September 29-30, 2005
2
Overview

• 1. Policy Issues
• 2. Analytical Framework
• 3. Simulation Results
• 4. Conclusions

3

• 1. Policy Issues
• 2. Analytical Framework
• 3. Simulation Results
• 4. Conclusions

4
International Climate Policy
World
United Nations Framework Convention on Climate
Change (1992)

• Kyoto-Protocol (1997)
• QELROs for industrialized countries (2008-2012
  vs. 1990)
• Flexible mechanisms (cost efficiency)
• IET International Emissions Trading (ET
  between Annex B countries)
• JI Joint Implementation (project-based ET
  between Annex B countries)
• CDM Clean Development Mechanism (project-based
  ET with developing countries)
• Entering into force as from 15.2.2005 (after
  Russias signature)

Europe

• EU commitment under Kyoto minus 8 (bubble)
• EU Burden Sharing Agreement (1999) national
  emission budgets
• EU Emissions Trading System (ETS) for
  energy-intensive industries
• EU-ETS Directive (2003)
• Entering into force as from 1.1.2005

• DIR sectors (covered by ETS)
• NDIR sectors (outside ETS)

5
Multiple Emission Markets
Rest of Kyoto
European Union
DIR

• Russia (Hot Air)
• Ukraine (Hot Air)
• Japan
• Canada

Firms
NDIR
Governments
Governments

• One EU-ETS market between DIR sectors
• Complementary regulation in NDIR sectors for
  each EU Member State
• Comprehensive Kyoto market

6
Issue Compliance Cost and Environmental
Effectiveness
Policy dimensions

• Linkages of emissions markets
• Strategic behavior of Russia (rationing of Hot
  Air)

Policy scenarios
7

• 1. Policy Issues
• 2. Analytical Framework
• 3. Simulation Results
• 4. Conclusions

8
Marginal Abatement Cost Curves
Reduced form representation

• Direct compliance (abatement) cost
• No indirect (general equilibrium) effects such
  as changes in terms of trade

Graphical illustration Effective demand and
monopoly supply
C (/t)
JPN
C (/t)
CAN
75
300
D
CXSU
50
200
EUR
I
25
100
H
MRXSU
100
200
150
100
50
300
400
abatement(Mt C)
abatement(Mt C)
9
Algebraic Model (1) Competitive Setting
Competitive emission trading
First-order condition
Aggregate fringe import demand (i ? F)
10
Algebraic Model (2) Monopolistic Supply
Monopolistic permit supply (m)
First-order condition
11
Model Implementation (1) Parameterization of MACs
Least-square approximation
Discrete observations of (p, q)

• Current implementation top-down (PACE/GTAP)
• Alternative options bottom-up (POLES, PRIMES,
  etc.)

12
Model Implementation (2) Regions and Sectors
Regions

• EU EU-14 (separated), Hungary, Poland, Rest of
  Central European Associates
• Other Kyoto parties Canada, Japan, Former Soviet
  Union (Russia and Ukraine)

Sectors

• DIR energy-intensive sectors (as covered by
  current EU-ETS)
• NDIR remaining sectors of economy

13
Model Implementation (3) Benchmark Data
Carbon emissions and carbon reduction targets
14

• 1. Policy Issues
• 2. Analytical Framework
• 3. Simulation Results
• 4. Conclusions

15
Groups of Policy Scenarios
Group 1 Kyoto sine EU-ETS (covered in the
literature)

• NoTrade Diverging marginal abatement cost
  (efficiency loss)
• Kyoto-C Full supply of Russian Hot Air
• drives MACs down to zero (no compliance cost)
• makes emission constraint non-binding (no
  environmental effect)
• Kyoto Market power by Russia
• generates revenues for Russia
• positive MACs (compliance cost) and
  environmental effect

Group 2 Kyoto cum EU-ETS (all with Russian
market power)

• EU-Closed Intra-EU implementation of Kyoto
  targets (EU-ETS for DIR sectors and Kyoto
  IET across EU Member States only)
• EU-NDIR-Trade same as EU-Closed but EU Member
  States use Kyoto IET on global market for
  their NDIR sectors
• EU-FSU same as EU-NDIR-Trade but Russia is part
  of EU-ETS market

16
Results Kyoto sine EU-ETS
Compliance cost (in millions of )
Marginal abatement cost (in per ton of CO2)
17
Results Kyoto cum EU-ETS
Compliance cost (in millons of )
Note

• EU-Closed / EU-N-Trade Under the current
  implementation of the EU-ETS, DIR sectors in
  Europe are endowed with more emissions than
  required for projected BaU emissions in 2005.
  Total compliance costs are thus equal to
  compliance costs of NDIR sectors. In scenario
  EU-N-Trade Europe can lower the NDIR compliance
  costs by linking this market to the Kyoto
  market.

• EU-FSU Here, FSU engages in the EU-ETS and
  behaves there as monopoly supplier. With the
  current EU-ETS implementation, the MAC in the DIR
  sectors of the EU-ETS would be zero and
  thus EU-FSU would be equal in outcome to
  EU-N-Trade. We therefore re-calibrated the
  closed EU-ETS market to yield a CO2 price of 20
  (by increasing uniformly the BaU emissions
  within the DIR sectors).

18
Results Kyoto cum EU-ETS
Marginal abatement cost (in per ton of CO2)
Rationing of Hot Air
19
Results Environmental Effectiveness
Emission reduction (in from BaU)
Note Scenario EU-FSU is based on higher BaU
emissions for DIR-sectors in Europe.
20

• 1. Policy Issues
• 2. Analytical Framework
• 3. Simulation Results
• 4. Conclusions

21
Summary

• Russias role in international emissions markets

• Russian Hot Air supply is sufficient to make
  Kyoto constraints non-binding
• Market structure on different permit markets
  matters
• Linkages of permit markets matter

• Segmentation of the EU Emission Market under the
  EU-ETS in principle allows Russia to exert
  market power on two international markets.

• Global environmental effectiveness and regional
  compliance cost depend crucially on Russias
  rationing of Hot Air as monopoly supplier(The
  monopolist is the environmentalists best
  friend.).

• Russia benefits from the segmentation of EU
  Emission Market as compared to uniform Kyoto
  regime since it can exert monopoly power more
  effectively.

• Towards more stringent emission constraints,
  Russia may further benefit through additional
  abatement (beyond sales of Hot Air).