Compliance and Imperfect Intertemporal Carbon Trading

This paper examines three compliance mechanisms of the Kyoto Protocol: (i) the restoration rate, (ii) the commitment period reserve rule, and (iii) the suspension mechanism, all potentially constraining greenhouse gas emissions trading across time and space. The joint effect of these mechanisms on prices and costs is studied in a twoperiod model under various assumptions about the competitiveness of the permit market and US participation. The analytical results indicate that the restoration rate can make discounted permit prices decrease over time. With the commitment period reserve, marginal costs may not only be lower, but also higher than the permit prices. The suspension rule will under quite general circumstances not affect prices and costs; only shift non-compliance from future sellers to future buyers. The numerical results suggest that with imperfect permit markets and non-participation of the US in the Kyoto Protocol in 2010, none of the three rules becomes binding.compliance; market power; emissions trading; Kyoto Protocol

Simulating the Carbon Permit Market with Imperfect Observations of Emissions: Approaching Equilibrium through Sequential Bilateral Trade

It is still unclear how the Parties of the Kyoto Protocol will deal with emission trading and compliance given the fact that emissions of greenhouse gases are not perfectly observable and underreporting of emissions may occur. This paper gives an analytical and numerical analysis of the carbon permit market given imperfect observation of emission levels. Our setting is such that Parties must undershoot their emission targets to be able to verify compliance with the Protocol if unreported emissions are accounted for. Targets can be met by traditional emission abatement, by investing in monitoring (reducing unreported emission) or by trading in permits. The paper proves that sequential bilateral trade converges to an equilibrium where marginal abatement costs equal marginal monitoring costs across all Parties. The method is applied for the fossil fuel related carbon emissions of the Parties of the Kyoto Protocol. Our numerical findings indicate that USA, Japan and the European Union could increase their compliance costs significantly when uncertainty in the emission levels is included. Although Central Eastern Europe, Russia, Ukraine are assigned to have larger uncertainties in emission levels, their net costs may be reduced as they can sell emission reductions at a higher price. Compared to the no trade case, we find that emissions trading may lead to somewhat lower aggregate uncertainty in greenhouse gas accounts

Carbon Trading with Imperfectly Observable Emissions

The Kyoto Protocol foresees emission trading but does not yet specify verification of (uncertain) emissions. This paper analyses a setting in which parties can meet their emission targets by reducing emissions, by investing in monitoring (reducing uncertainty of emissions) or by (bilaterally) trading permits. We derive the optimality conditions and carry out various numerical simulations. Our applications suggest that including uncertainty could increase compliance costs for the USA, Japan and the European Union. Central Europe and the Former Soviet Union might be able to gain from the trading due to higher permit prices. Emissions trading could also lower aggregate uncertainty on emissions

Climate Engineering: Cost benefit and beyond

International efforts on abating climate change, focusing on reductions of greenhouse gas emissions, have thus far proved unsuccessful. This motivates exploration of other strategies such as climate engineering. We modify the Dynamic Integrated model of Climate and the Economy (DICE), and use it in a cost-benefit analysis of climate engineering specifically deposition of sulphur in the stratosphere. The model simulations show that climate engineering passes a cost-benefit test. The cost of postponing climate engineering by 20-30 years is relatively low. Going beyond these standard cost-benefit analyses, climate engineering may still fail. Voters may dislike the idea of climate engineering; they do not like the idea of tampering with nature, and their dislike stands independent of outcomes of cost-benefit analyses.Climate change; climate engineering; cost-benefit analyses; public choice.

Estimates of carbon sequestration coefficients for forestry grown on Norwegian agricultural land

This working paper documents the derivation of carbon sequestration coefficients for forest grown on Norwegian agricultural land. These figures will serve as input to the established model Jordmod – an economic model of the Norwegian agricultural sector. The purpose is to carry out greenhouse gas policy analysis. Associated with this paper is a GAMS program (The General Algebraic Modeling System), which computes the figures. The structure of this working paper is made to facilitate reading the program (given in Appendix A). The main issue is the expected woody biomass production on agricultural land. While there is plenty of data and information about wood productivity of forest land, agricultural land is not classified in terms of its abilities to produce woodwork. So our main point of departure is to look at forest land statistics, and from that, construct coefficients to be applied on the agricultural land

Structural Adjustment and Endogenous Worker Recall Probabilities

In this paper we investigate the incentives of unemployed workers to wait for a recall when recall probabilities are endogenously determined by the waiting decisions of others. Because of a positive externality that arises when workers seek new employment, an excessive number of workers choose to wait for a recall, and structural adjustment is slow. We also find that a small reduction in the unemployment benefits, or introducing a small cash bonus for workers that get a new job, may have no e.ect on unemployment in some cases, while eradicating significant levels of unemployment in other cases. Our analysis suggests that the government may face a Samaritan’s Dilemma if it can influence the recall probability of workers, and that multiple equilibria may exist in a game involving both workers and an unemployment-averse government. Furthermore, we explore a link to the war of attrition literature, showing that the Bulow and Klemperer (1999) ”one too many”-result may not hold if there is uncertainty concerning when the game ends.structural adjustment,unemployment, recalls, search, war of attrition.

Structural adjustment and endogenous worker recall probabilities

In this paper we investigate the incentives of unemployed workers to wait for a recall when recall probabilities are endogenously determined by the waiting decisions of others. Because of a positive externality that arise when workers seek new employment, an excessive number of workers choose to wait for a recall, and structural adjustment is slow. We also find that a small reduction in the unemployment benefits, or introducing a small cash bonus for workers that get a new job, may have no effect on unemployment in some cases, while eradicating significant levels of unemployment in other cases. Our analysis suggests that the government my face a Samaritan’s Dilemma if it can influence the recall probability of workers, and that multiple equilibria may exist in a game involving both workers and an unemployment-averse government. Furthermore, we explore a link to the war of attrition literature, showing that the Bulow and Klemperer (1999) ”one too many”-result may not hold if there is uncertainty concerning when the game ends.Structural adjustment; unemployment; recalls; search; war of attrition.

Coalition formation and strategic permit trade under the Kyoto Protocol

This paper discusses coalition formation with side payments in markets for transferable property rights where strategic agents prevail on both sides of the market. Our concern is emissions permit trading under the Kyoto Protocol. While a seller cartel is not profitable, our analysis indicates that coalitions between sellers and buyers pay off. Three stable cartels are found. None involve all agents, yet they all induce overall e¢ ciency. To support a stable coalition, the EU, Japan and Canada may pay together between 0 and 13 billion US dollars per year to Russia. The permit price and society-wide emission reductions are nil.Emissions trading; Kyoto Protocol; cartel formation; merger profitability.

Making climate change negotiable: The development of the Global Warming Potential index

One important contribution from science to environmental negotiations is the provision of scientific models, methods and concepts that may serve as decision-making tools and that hence may assist policy-makers in developing adequate solutions to environmental problems. In the context of climate change, the Global Warming Potential index has served a significant role in the process of making climate change negotiable. The Global Warming Potential index, which is a methodology for comparing the climate effect of a set of greenhouse gases and for transforming their emissions into a common measure, currently constitutes the foundation for implementation mechanisms adopted in the Kyoto Protocol, such as emissions trading, joint implementation and the clean development mechanism. The topic of this trial lecture is the development of the Global Warming Potential index, the GWP index, and the political role of this methodology in the development of the climate regime. The history of the GWP index, the political context within which this methodology was first introduced and the political role this methodology has acquired is an interesting case of science–policy interaction which is illustrative of the mechanisms at work in such processes and the possible implications they may have both for the scientific and the political process. After an introductory note, in which I introduce you to some of the essential characteristics of the problem of a human induced climate change and the political conditions that led to a strong political demand for the GWP methodology, I will discuss the more general notion of solution design models in negotiations, and requirements to their adequacy. In the third part of the presentation I will discuss the GWP index in more detail, and focus particularly on some of the more problematic aspects and shortcomings associated with this methodology. In the fourth part of the lecture, I will return to the political process on climate change, and discuss some implications for the adequacy of the solution design model adopted in the climate regime. In the last and final part of the lecture, then, I will draw some conclusions from this discussion. The lecture is based on previous and current research at my own institute, CICERO, and secondary literature, in particular work by Simon Shackley and Brian Wynne as well as Steven Smith and Tom Wigley

Can geological carbon storage be competitive?

In this paper we review the literature on the costs and benefits of geological carbon storage and the estimates of greenhouse gas permit prices under the Kyoto Protocol commitment period and beyond. Combining these results for a set of circumstances, we find that in the near-term Carbon Capture and Storage (CCS) is likely to be an economically viable option only in a small set of circumstances, particularly enhanced oil recovery. In the medium and longer term, with improvements in CCS technology and the likelihood of increased greenhouse gas permit prices, CCS is likely to become an economically viable option under a wider range of circumstances