Trading Sulphur Emissions in Europe: `Guided Bilateral Trade'

In this paper a system of `guided permit trading' is developed for SO₂emissions reduction which considers permit trading as a bilateral andsequential process. This implies that in order to meet the deposition targetsat the end of the trading process, not every single trade transaction hasto meet the deposition targets. To ensure that the target is ultimately met,the number of permits traded should be controlled by a trade coordinatinginstitution. A simulation of the system of guided bilateral trading ofSO₂ permits among European countries on the basis of the SecondSO₂ Protocol indicates that some non-profitable trade transactionstake place. This prevents the cost effective emission allocation from beingfully achieved. However, the calculations show that guided bilateral permittrading may generate substantial cost savings while contributing toenvironmental protection.     

Market power,private information,and the optimal scale of pollution permit markets with application to North Carolina's Neuse River

We extend the analysis of optimal scale in pollution permit markets by allowing for both market power and private information. We characterize the total costs (abatement costs and damages) under market power and private information and compare them to total costs under competition. It is possible for both market power and private information to lead to lower total costs than competition, but generally the differences between the three market structures will be small. We also conduct an optimal scale analysis of nitrogen pollution from waste water treatment plants (WWTP) into North Carolina's Neuse River System. An economic model of damages and abatement costs is integrated with a hydro-ecological model of nitrogen flow through the Neuse. We determine the optimal number of trading zones and allocate the WWTP into these zones. Under the most likely regulatory scenario, we find cost savings of 1.55 million dollars per year under the optimal market design relative to the typical 303(d) regulation in which the WWTP are not allowed to trade.     

Trade-offs in sulfur emission trading in Europe

How to implement emission trading is one question in the current negotiations on a new sulfur protocol in Europe. Whereas the current protocol stipulates a 30 percent uniform reduction, national emission ceilings included in the proposed new protocol imply differentiated reductions. In addition, emission and fuel standards are proposed. This paper examines the costs and environmental impacts of emission trading. Emission trading combined with regulations is a new element in the paper. Calculations using the RAINS (Regional Acidification INformation and Simulation) model suggest that overlaying emission trading on regulations not only reduces the cost savings but has beneficial impacts as well: ecosystem protection is not changed and significant decreases in environmental benefits for countries are largely avoided. Emission trading can also be used to decrease emissions and increase ecosystem protection. If combined with existing legislation, emission trading minimizes losses in expected environmental benefits for some countries, and most countries gain. However, the initial distribution of emission ceilings has to be used so that some countries are not confronted with higher costs. Trade-offs appear to exist between the use of emission trading to achieve cost savings on the one hand, and ecosystem protection and distributional equity on the other.     

Methane and Nitrous Oxide Emissions from Agriculture in the EU: A Spatial Assessment of Sources and Abatement Costs

Agriculture significantly contributes to emissions of greenhouse gases in the EU. By using a farm-type, supply-side oriented, linear-programming model of the European agriculture, the baseline levels of methane and nitrous oxide emissions are assessed at the regional level in the EU-15. For a range of CO₂-equivalent prices, we assess the potential abatement, as well as the resulting optimal mix of emission sources in the total abatement. Furthermore, we show that the spatial variability of the abatement achieved at a given carbon price is large, indicating that abatement cost heterogeneity is a fundamental feature in the design of a mitigation policy. The cost savings permitted by market-based instruments relative to uniform standard are shown to be large.     

Climate policy in Western Europe and avoided costs of air pollution control

Abatement of CO₂ emissions will be accompanied by reduced air pollutant emissions such as particulate matter (PM), SO₂, and NO_x. This, in turn, will reduce the need for end of pipe (EOP) pollution control technologies to meet future air quality targets. This dynamic could put more stringent air quality goals within reach, and increase the political feasibility of climate policy. This paper presents a CGE model that has been modified to include the emissions and EOP abatement of PM, SO₂, and NO_x from stationary sources in the EU-17. Emissions of pollutants are modeled as fixed-factor complementary inputs to their associated source. Abatement in each sector is modeled as a substitution between the pollutants and discrete abatement technologies, each of which is sector-specific and characterized by a marginal abatement cost and technical capacity constraint. Scenarios are run to 2020, to assess the costs and co-benefits of simultaneous air quality and climate policies. We find that under the Kyoto Protocol in 2010, the welfare cost of pollution control is reduced by 16% compared to the baseline, effectively offsetting the cost of CO₂ abatement by 15%. The co-benefit results depend heavily on policy choices, and their magnitude relative to total costs is likely to decline as greenhouse targets become more ambitious. In our scenarios, pollution control cost savings range from 1.3 to 20% in 2020, yielding a climate cost offset range of 0.2 to 3.9%. The CO₂ credit imports allowed by the EU via the Clean Development Mechanism (CDM) offer a total savings of $9.7bn in 2020, but only need to be compensated by an additional $0.3–0.4bn in domestic pollution control from stationary sources.     

Industry-level emission trading between power producers in the EU

This paper investigates how restrictions for emission trading to the energy-intensive power sector will affect the magnitude and distribution of abatement costs across EU countries vis-à-vis a comprehensive EU emission trading regime. It is found that emission trading between European power sectors allows the harvest of a major part of the efficiency gains provided by full trade as compared to strictly domestic action. However, trade restrictions may create a more unequal distribution of abatement costs across member states than is the case for a comprehensive trade regime. The reason for this is that restricted permit trade enhances secondary terms-of-trade benefits to EU member countries with low marginal abatement costs at the expense of the other EU member states.     

Static and dynamic efficiency of pollution control strategies

A great deal of the economic literature on pollution control strategies concentrates on the efficiency of environmental policy instruments. Most analytical studies in this field show that market instruments are more efficient with respect to the cost of pollution abatement of a given number of polluters than non-market instruments. According to several analytical studies, market instruments should also be more efficient with respect to innovation in pollution abatement equipment than non-market instruments. In the empirical literature a great number of case studies exist with estimations of the savings of abatement costs of market instruments in a situation without technological progress. Empirical studies about the impact of environmental policy market instruments on the abatement costs in situations with technological progress are lacking.The purpose of this paper is to fill this gap. The paper deals with an empirical estimation of abatement costs for the emission of SO₂ of coal-fired electricity units in the Netherlands from 1985 to 2000. First, the working of market instruments and non-market instruments (the existing environmental policy of the Dutch government) is simulated in a static situation. Second, we analyse the learning effects of flue gas desulphurization. The efficiency advantage of market instruments turns out to be larger in a situation of technological progress than in a static situation.     

Asymmetric Regulation of Identical Polluters in Oligopoly Models

Studies of optimal second-best environmental regulation of identical polluting agents have invariably ignored potentially welfare-improving asymmetric regulation by imposing equal regulatory treatment of identical firms at the outset. Yet, cost asymmetry between oligopoly firms may well give rise to private as well as social gains. A trade-off is demonstrated for the regulator, between private costs savings and additional social costs when asymmetric treatment is allowed. Asymmetry is indeed optimal for a range of plausible parameter values. Further, it is demonstrated that for a broad class of abatement cost functions, there is scope for increasing welfare while keeping both total output and total emission constant. Some motivating policy issues are discussed in light of the results, including international harmonization and global carbon dioxide reduction.     

Carbon Abatement and International Spillovers

Carbon abatement policies in large open economies affect both the allocation of domestic resources and international market prices. A change in international prices implies an indirect secondary burden or benefit for all trading countries. Based on simulations with a large-scale computable general equilibrium model of global trade and energy use, we show that international spillovers have important welfare implications for carbon abatement policies designed to meet exogenous emission reduction targets. We present a decomposition of the total welfare effect of carbon abatement policies into a primary domestic market effect (at constant international prices) and a secondary international spillover impact as a result of changes in international prices. This decomposition reveals the extent to which domestic abatement costs are increased or decreased as a result of the impact of carbon abatement on international prices.     

Optimal intensity targets for greenhouse gas emissions trading under uncertainty

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country’s permit allocation is indexed to its future realized GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.      

In or out: efficient inclusion of installations in an emissions trading scheme?

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.     

行业视角下减排成本估算及减排路径研究

碳达峰碳中和是中国经济发展环境治理的战略目标,减排成本与减排路径是该战略实施中两大现实问题。基于行业视角,利用投入产出方法,对行业减排成本、技术减排效应及减排路径展开研究,基本结论如下：①行业减排成本差异大,整体减排成本逐年上升。在三个代表性年份行业最高与最低减排成本相差40-60倍,减排成本绝对差值在1500-3000$/t。在2000-2010年间, 32个行业减排成本均有不同程度的上升, 全社会整体减排成本上升了56.98%。②技术进步的减排贡献较大,部分行业技术减排有限。在产出固定假设下,2000-2010年技术进步实现累计减排57.09亿t,累计技术减排率达到47.88%；但在旅游、住宿餐饮等行业技术减排率为负,技术因素导致的排放不减反增。③行业减排路径应遵循从高碳到低碳的顺序。基于减排成本与技术减排两大因素的减排路径规划显示,优先和重点减排行业主要集中在能源生产供给、加工制造、交通运输、采矿及设备制造等高能耗高排放行业；可相对延后和非重点减排行业主要为食品烟草等传统加工制造业以及金融、房地产等现代服务业。     

Marginal abatement costs of greenhouse gas emissions from European agriculture, cost effectiveness, and the EU non-ETS burden sharing agreement

We propose a quantitative assessment of the marginal abatement costs (MAC) of greenhouse gas emissions from European agriculture and analyze the implications of the non-ETS burden-sharing agreement (BSA) for this sector. This assessment is based on MAC reduced forms, the generic specification of which enables simple parameterization and numerical computations. Such MAC curves are parameterized for each Member State using the outputs of a detailed model of the European agricultural supply. They are then used to compute total and marginal abatement costs involved by the BSA targets, as well as the cost-effective effort sharing, the corresponding emission price and abatement costs. The main findings are: (i) flexibility mechanisms such as a cap-and-trade system for agricultural emissions could reduce the total costs of meeting the 10% EU abatement target by a factor two to three relative to the strict implementation of each country's target, (ii) the corresponding equilibrium emission price is found to be 32-42 €/tCO₂eq depending on the assumption regarding business-as-usual emissions, and (iii) a cap-and-trade system with allowances based on the BSA targets would involve substantial transfers from EU-15 countries to New Member States, an important share of which being made of ‘hot air’.     

Strategic Investment in Climate Friendly Technologies: The Impact of Global Emissions Trading

Our point of departure is that a group of industrialized countries invest in research and development (R&D) of greenhouse gas (GHG) abatement technologies. R&D investments influence the future GHG abatement choices of both industrialized and developing countries. We distinguish between investments that reduce industrialized countries’ abatement costs and investments that reduce developing countries’ abatement costs. Unlike earlier contributions, we include global trading in emission permits. This changes the nature of the game. With global permit trading, industrialized countries should in many cases invest strategically in technologies that only reduce abatement costs at home. This comes in addition to investments abroad. Second, we show that R&D investments always decrease total emissions. Finally, we find that the developing region receiving investments always benefits.     

A dynamic general equilibrium model of pollution abatement under learning by doing

In 2013, Beladi et al. constructed a dynamic general equilibrium model of pollution, and characterized a steady-state equilibrium. In this paper, we extend Beladi et al.’s model to an even more general model in which the pollution abatement costs under learning by doing are taken into account. In our model, the instantaneous abatement costs depend on both the rate of abatement and the experience of using a technology. Our objective is to apply optimal control theory to investigate the dynamic general equilibrium model of pollution abatement, and derive the steady-state equilibrium properties and optimal levels of emission permits and pollution treatment.     

Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges

A major concern with tradable emission permits is that stochastic permit prices may reduce a firm’s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under efficient permit trading, the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. We develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits. We compare the resulting investment incentive with that under charges. After controlling for the assumption that random shocks affect the abatement cost linearly, we find that firms’ investment incentive decreases in cost uncertainties, but more so under emissions charges than under permits. Therefore, tradable permits in fact may help maintain firms’ investment incentive under uncertainty.     

Heterogeneous capital stocks and the optimal timing for CO2 abatement

Some recent research suggests benefits to a delayed CO₂ emission reduction strategy. If the target level of atmospheric CO₂ concentration can be achieved in spite of delay, several factors suggest economic benefits to a delay strategy. However, the analyses that lead to these conclusions typically ignore or underestimate the significant heterogeneity in the turnover rate of society's capital stock. This research explores the relationship between the turnover rate of capital stocks and the delay decision using a model and empirically estimated abatement costs. The results suggest that under many different assumptions, an early start at CO₂ abatement for long-lived capital stocks would be economically optimal.     

Games of Climate Change with International Trade

We analyse games of greenhouse gas emission reduction in which the emissions and the emission reduction costs of one country depend on other countries' emission abatement. In an analytically tractable model, we show that international trade effects on costs and emissions can either increase or decrease incentives to reduce emissions and to cooperate on emission abatement; in some specifications, optimal emission reduction is unaffected by trade. We therefore specify the model further, calibrating it to larger models that estimate the costs of emission reduction, trade effects, and impacts of climate change. If trade effects are driven by total emission reduction costs of other countries cooperation is slightly more difficult than in the case without trade effects. If trade effects are determined by relative emission reduction efforts in other countries, cooperation becomes easier. Carbon leakage does not affect our qualitative insights, although it does change the numbers.     

Rethinking the optimal level of environmental quality: justifications for strict environmental policy

Traditional environmental theory suggests that the optimal level of a pollution emission occurs when the marginal damage created by the emissions is equal to the marginal cost of reducing the emissions. We argue that the benefits from reducing pollution should be much more broadly defined to include at least three other sources of benefits. First, we develop a game-theoretic model in which firms may under-invest in cost-saving ‘green technologies’. Second, we demonstrate that consideration of future damages and abatement costs leads to a lower current optimal pollution level than that obtained in traditional models. Finally, we show that ecological complexity creates indirect pathways by which greater pollution increases the likelihood of generating irreversible environmental damage. This broader definition of the benefits of pollution abatement yields an optimal level of pollution that may actually be less than the level at which conventionally-measured marginal damages are equal to marginal abatement costs. Thus, environmental policy should be stricter.     

Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty

The present paper analyzes the investment effects of emission trading scheme (ETS) when emission permits are bankable and there is technological uncertainty with regard to the abatement cost. A real option model is employed to accommodate irreversibility of investment and cost uncertainty. In the absence of abatement cost uncertainty, a bankable ETS reduces a firm's incentive for environmental investment, because the firm can utilize the banked permits for future compliance which act as substitutes for abatement investment. However, when cost uncertainty is prevalent, investment may reduce the opportunity cost of irreversible investment under the banking system, thereby increasing a firm's investment incentive. The condition is derived under which a bankable ETS provides higher investment incentives than a non-bankable ETS does.