an experimental economic analysis of carbon trading options for australia
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An Experimental Economic Analysis of Carbon Trading Options for Australia. John Tisdell and Corinne Grainger Atmospheric Environment Research Centre Griffith University Brisbane Australia www.economicexperiments.com. Outline. Background Research questions - PowerPoint PPT PresentationTRANSCRIPT
An Experimental Economic Analysis of Carbon Trading Options for Australia
John Tisdell and Corinne GraingerAtmospheric Environment Research Centre
Griffith University Brisbane Australia
www.economicexperiments.com
Outline
• Background• Research questions• Experimental design and procedures• Experimental results• Conclusions and recommendations
Background
• Government reports: PM Task Force, Garnaut Review, Carbon Pollution Reduction Scheme• emissions trajectory, coverage, permit allocation, inter-temporality,
governance and compliance.
• Two main issues..– Inter-temporal flexibility
Futures and spot markets– Emissions trajectory
Low or high permit reductions
Inter-temporal flexibility
• In markets for pollution such as greenhouse gases, inter-
temporal flexibility plays a large role in ensuring market
success (Stavins 1998; Stern 2007).
Emissions trajectory
• The trajectory chosen to achieve the final level of stabilisation is of as much importance in determining the costs of mitigation, as the actual level of final stabilisation (Goulder and Mathai 2000; Grübler and Messner 1998; Jaffe et al. 1999,
2002; Manne and Richels 1997, 2004; Richels and Edmonds 1995; Schneider and Goulder 1997; Wigley et al. 1996)
6
Emissions Trajectory
• PM Task Force Report 2007 p.101
Research questions
1. Emissions trajectoryDoes the rate of decline in carbon permits impact on
compliance?
2. Inter-temporal flexibilityDo futures markets produce better results than simple spot
markets in terms of compliance and market activity?
Experimental design and procedures
High Reduction
(HR)
Low Reduction
(LR)
Spot Market
(SM)
4 sessions
10 periods
4 sessions
10 periods
Futures Market
(FM)
4 sessions
10 periods
4 sessions
10 periods
Experimental Environment• Players were informed that they were the producer of a fictitious good
and that they could produce this good up to a maximum production level. • They were provided with a simple production function and marginal value
for the good. They were also provided with a stock of carbon permits which declined over time.
• For each unit they produced they were required to hold a permit. • Players faced random auditing and if found to have less permits than their
production they would face a fine. • The aim was to maximise their earnings taking into account their earnings
from production, trade and any fines they may receive. • Instructions and Quiz: http://www.ens.gu.edu.au/Johnt/carbon_paper_1/
Computer Screens
Income Table
Future Trading Table
Experimental Parameters
Pd 1 2 3 4 5 6 7 8 9 10
Low 90 86 82 78 74 70 66 62 54 50
High 90 83 76 69 62 55 48 41 34 27
Player 1 2 3 4 5 6 7 8
Marginal Value 40 60 80 100 120 140 160 180
Modeled equilibrium prices and associated fines
Period 1 2 3 4 5 6 7 8 9 10
Low
Equilibrium Price 50 50 70 70 70 90 90 90 90 110
Penalty 125 125 175 175 175 225 225 225 225 275
High
Equilibrium Price 50 70 70 90 90 110 110 130 130 150
Penalty 125 175 175 225 225 275 275 325 325 375
Experimental results
• Level of Compliance – Differential between production and carbon permit
holdings
• Convergence– Market prices and quantities to CE
Convergence of market prices through rounds
0 1 2 3 4 5 6 7 8 9 10
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00Spot - Low reduction sessions: market price convergence
through rounds
session 1
session 2
session 3
Session 4
Round
Mar
ket P
rice
Diff
eren
tial
(obs
erve
d - m
odel
led)
0 1 2 3 4 5 6 7 8 9 10
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00Spot - high reduction sessions: market price convergence
through rounds
session 1
session 2
session 3
Session 4
Round
0 1 2 3 4 5 6 7 8 9 10
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00Future - low reduction sessions: market price convergence
through rounds
session 1
session 2
session 3
session 4
Round
Mar
ket P
rice
Diff
eren
tial
(obs
erve
d - m
odel
led)
0 1 2 3 4 5 6 7 8 9 10
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00Future - high reduction sessions: market price convergence
through rounds
session 1
session 2
session 3
session 4
Round
Convergence of market quantities through rounds
0 1 2 3 4 5 6 7 8 9 10
-40
-20
0
20
40
60
80Spot - Low reduction sessions: market quantity convergence
through rounds
session 1
session 2
session 3
Session 4
Round
Mar
ket q
uanti
tydi
ffer
entia
l (o
bser
ved
- mod
elle
d)
0 1 2 3 4 5 6 7 8 9 10
-60
-40
-20
0
20
40
60
80Spot - high reduction sessions: market quantity
convergence through roundssession 1
session 2
session 3
Session 4
Round
0 1 2 3 4 5 6 7 8 9 10
-100-80-60-40-20
020406080
100Future - low reduction sessions: market price convergence
through roundssession 1
session 2
session 3
session 4
Round
Mar
ket q
uanti
ty d
iffer
entia
l (o
bser
ved
- mod
elle
d)
0 1 2 3 4 5 6 7 8 9 10
-80
-60
-40
-20
0
20
40
60Future - high reduction sessions: market quantity convergence
through roundssession 1
session 2
session 3
session 4
Round
Spot and Future Quantities
Mean
Quantity
Futures Market, Low
Reduction
Futures Market, High
Reduction
Round 7 8 9 10 7 8 9 10
Spot Qty 11.68 10.83 12.35 10.84 10.94 10.82 11.85 8.36
Forward Qty 6.67 11.38 11.50 7.92 2.00 5.00 7.00 6.70
p-value 0.250 0.891 0.815 0.366 0.000 0.000 0.442 0.522
Interaction of emission reductions and market form
Future volumes traded
Conclusions and recommendations• The policy implications of these results.. Based on
the experimental data:• If the authority is concerned with achieving an
emission target quickly, high rates of permit reduction with spot markets should be considered.
• Higher rates of reduction did not result in greater non-compliance.
• There should be high rates of compliance and limited need for futures markets during the initial phase.
• If a low emissions trajectory is adopted then it could be implemented with a futures market option.
• The findings of this work are based on experimentation.
• Experimental economic techniques are the glass houses of policy… Field trials are required before the new variety is released…
• Further research is required to explore operational and field specific implications.
•
• Key elements:– Reduce carbon pollution by 60 per cent of 2000 levels by 2050.– Unconditional 5 per cent reduction in carbon pollution below 2000 levels by
2020. Up to 15% depending on global agreement.– Use of market-based instruments– Assistance for households and business– Price cap
• The intention is to commence the scheme on 1 July 2010.
Carbon Pollution Reduction Scheme
• Coverage
Entities with direct emissions (stationary and transport) of 25 000 t co2-e per year or more.
Setting the cap
5 year caps with gateways (projections) to 10 years depending on international agreements Differences between the scheme cap and the national target will be reconciled through the
allocation of notional credits to firms and industries not covered by the scheme.
Definition and allocation of permits
Vintage permits defined in tones of carbon emission Administrative Allocations
• Emissions-intensive trade exposed industries (EITE)• Strongly affected industries
– Government auctions– Unlimited banking (exception: those issued under the price cap)– Short-term borrowing from following year (max 5%)
Framework
• Reporting and compliance Compliance requires surrender of one permit for each
tonne of carbon dioxide equivalent emitted Annual independent audit
National Greenhouse and Energy Reporting Act 2007. National greenhouse and Energy Reporting System -
http://www.nger.com.au
– EITE scheme• Emissions-intensive, trade exposed industries• 90% for activities that has at least 2000 t co2-e per million dollars of
revenue.• 60% for activities that have at least 1000 t co2-e per million dollars of
revenue.• 4 year evaluation – 1 July 04 to 31 December 08.
– strongly affected industries • Also includes strongly affected industries –coal fired electricity generation
1 July 04 to 30 June 07 >0.86 t co2-e/MWh. Due for review in 2013. • Assistance will be in the form of funding for carbon capture, storage
technology and sustainable coal. It will be delivered through existing schemes. (National Low Emissions Coal Initiative)
• Direct assistance in the form of administratively allocated permits (approx. $3.9 billion)
– Objective – avoid ‘carbon leakage’ – companies moving overseas as a result of carbon reduction requirements.
Administrative allocation
• Auction will be held 12 times through the financial year• Future vintage auctions – four years of vintages will be
advanced auctioned (current vintage plus advance auctions of three future vintages).
• Simultaneous ascending clock auctions• Price cap in 2010-2015 – price cap of $40 - unlimited store of
additional permits at the fixed price.• Effectively capping prices and imposing a static Pigovian tax
on any firm who can earn more than $40/Ct from production.
• All permits are tradeable except those issued under the price cap scheme
Government Auction