emission trading and uncertainty paweł bartoszczuk systems research institute, pas, poland...
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Emission trading and uncertainty
Paweł BartoszczukSystems Research Institute,
PAS,Poland
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Outline
• The idea of emission trading• Uncertainty in trading• Optimisation problem• Scenarios and results• Conclusion
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MAC’s for 2 regions (example)
p1
p3
k
D
CBA
MAC1
MAC2
Marginal cost of abatement
Carbon abated region 1
p2
Carbon abated region 2h tr
E
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Analysed regions (Annex B)
1. USA
2. Japan (JPN)
3. European Community 12 (as 1992) (EEC)
4. Other OECD (OOE)
5. Eastern Europe (EET)
6. Former Soviet Union (FSU)
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Necessary abatement
Base year emissions
(1990)Kyota qouta
Kyoto Emission target in
2010
Anticipated emissions in
2010Abatement
agreed
Mton Mton Mton Mton-1- -2- -3- -4- -5-
='2' x '1' ='4'-'3'
USA 1362 93% 1267 1838 571JAPAN 298 94% 280 424 144EEC 822 92% 756 1064 308OOE 318 94% 301 472 171EET 266 104% 277 395 118FSU 891 98% 873 763 -110
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How to calculate the marginal and total costs
• Marginal cost of abatement
• P=aQ2+bQ, • Total costs
• C=0.33aQ3+0.5bQ2. • Coeficients a, b were taken from Ellerman
paper MIT (1998)
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Optimisation problem (1)
• i=1, ...6 are Kyoto Annex B regions;
• ai = emission at „i” (Mton) in 2010 if no
abatement.
• xi = emission at source i in Mton after
trade;
• ci= the total costs of abatement from ai to xi,
)]([min6
1iii
ix
xaci
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Optimisation problem (2)
• alfa =the risk of not satisfying the Kyoto target due to uncertainty di=relative uncertainty of the source i,
• Ki= the Kyoto target for country i,• ni= base year emission at source i in
Mton (1990),• yi= the number of emission permits
acquired by source i (yi is negative if region i is a net supplier of permits)
iiiii yKndxtosubject )21(
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Relative uncertainty of the region i
•USA 0,15
•JPN 0,1
•EEC 0,2
•OOE 0,17
•EET 0,3
•FSU 0,3Simulating the Carbon Permit Market with ImperfectObservations of Emissions:Approaching Equilibrium through Sequential Bilateral TradeOdd Godal
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Abatement, a=0.5 no uncertainty
alfa 0.5 USA JPN EEC OOE EET FSU SUM186 582 274 233 116 \ \571 144 308 171 124 \ 1318468 49 202 129 125 235 1207103 94 106 43 -1 -345 018% 65% 34% 25%
Permits exp(-)/imp(+) (Mton.)
Commitment
Marginal costs ($/ton)*Abatement agreed
Abatement after trade
permits price 128 $/tonReduction, permits exp/imp- (Mton)
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Cost of abatement and permits, a=0.5, no uncertainty
alfa 0,5 USA JPN EEC OOE EET FSU SUM
37 34 30 13 5 0 119
21 3 10 5 5 10 5413 12 14 5 0 -44 034 15 23 10 5 -34 543 19 7 3 0 34 66
6. Gain/cost no trade (%.) 9% 56% 23% 22% 0% 55%
if trade ($bill.)*
3. Permits exp(-)/imp(+) ($bill.)
4.Abatement+permits ($ bill.)
5.Gain from trade ($bill.)
1.Cost of abatement
if no trading ($bill.)*
2.Cost of abatement
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Results, a=0, uncertainty fully accounted for
alfa 0 USA JPN EEC OOE EET FSU SUM315 1044 729 514 455 33 \755 207 521 252 237 119 2090810 105 358 212 211 395 2090-55 103 163 40 26 -277 0
50% 31% 16% 11%
Marginal costs ($/ton)*
Reduction after trading
Permits exp(-)/imp(+) (Mton.)
%Commitment (import)
Reduction agreed
permits price 360 $/tonReduction, permits exp/imp- (Mton)
USA sells !
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Results, a=0, uncertainty fully accounted for
alfa 0 USA JPN EEC OOE EET FSU SUM
82 85 132 42 36 1 378
101 16 46 25 25 47 260-19 37 59 14 1 -100 -882 53 105 39 26 -53 2520 32 27 3 10 54 126
38% 20% 7% 28% 33%
1. Cost of abatement
6.Gain/Cost no trade (%)
4. Abatement+permits ($ bill.)
5. Gain from trade ($bill.)
after trade ($bill.)*
3. Permits exp(-)/imp(+) ($bill.)
if no trading ($bill.)*2. Cost of abatement only
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Results, a=0.33, uncertainty partly accounted for
alfa 0.33 USA JPN EEC OOE EET FSU SUM225 721 400 314 204 \ \632 165 378 198 157 \ 1530580 67 253 156 152 288 149552 98 125 42 5 -322 08% 60% 33% 21% 3%
Marginal costs ($/ton)*Reduction agreed
Reduction if trading
Permits exp(-)/imp(+) (Mton.)
% Commitment
permit price 190 $/ton
Reduction, permits exp/imp- (Mton) FSU-hot air 34 Mton
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Results, a=0.33, uncertainty partly accounted for
alfa 0,33 USA JPN EEC OOE EET FSU SUM
50 48 54 20 11 183
39 6 18 9 9 18 9910 18 24 8 1 -6149 24 42 17 10 -43 991 24 12 3 1 43 84
6.Gain/Cost reduction (%) 2% 50% 22% 15% 9% 46%
5.Gain from trade ($bill.)
2. Cost of abatement
after trade ($bill.)*
3. Permits exp(-)/imp(+) ($bill.)
4.Abatement+permits ($ bill.)
1. Cost of abatement
no trading ($bill.)*
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Gain from trading
scenario price USA JPN EEC OOE EET FSU SUMa=0 360 0 32 27 3 10 54 126a=0.33 190 1 24 12 3 1 43 84a=0.5 120 3 19 7 3 0 34 66
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How far marginal costs from market price?
USA JPN EEC OOE EET FSUa= 0 -45 684 369 154 95 -327a=0.33 35 531 210 124 14 /a=0.5 58 454 146 105 -12 /
Difference between marginal costs and permit price
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Conclusion
• Trading effect: cost reductions• Regions whose marginal cost is further from the
trading equilibrium will benefit more than those whose cost is closer
• The greatest benefits obtains FSU, that is the biggest exporter of permits, and Japan that imports more than 60% of its Kyoto commitment.
• When a=0, most regions gain from trading