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Carbon Emissions and The Kyoto Commitment in the European Union

We estimate reference CO2 emission projections in the European Union, and quantify the economic impacts of the Kyoto commitment on Member States. We consider the case where each EU member individually meets a CO2 emissions target, applying a country-wide cap and trade system to meet the target but without trade among countries. We use a version of the MIT Emissions Prediction and Policy Analysis (EPPA) model, here disaggregated to separately include 9 European Community countries and commercial and household transportation sectors. We compare our results with that of four energy-economic models that have provided detailed analyses of European climate change policy. In the absence of specific additional climate policy measures, the EPPA reference projections of carbon emissions increase by 14% from 1990 levels. The EU-wide target under the Kyoto Protocol to the Framework Convention on Climate Change is a reduction in emissions to 8% below 1990 levels. EPPA emissions projections are similar to other recent modeling results but there are underlying differences in energy and carbon intensities among the projections. If EU countries were to individually meet the EU allocation of the Community-wide carbon cap specified in the Kyoto Protocol, we find using EPPA that carbon prices vary from $91 in the United Kingdom to $385 in Denmark; welfare costs range from 0.6 to 5%.

Carbon offsets as a cost containment instrument: a case study of reducing emissions from deforestation and forest degradation

Carbon offset is one type of flexibility mechanism in greenhouse gas emission trading schemes that helps nations meet their emission commitments at lower costs. Carbon offsets take advantage of lower abatement cost opportunities from unregulated sectors and regions, which can be used to offset the emissions from regulated nations and sectors. Carbon offsets can also meet multiple objectives; for example, the Clean Development Mechanism in the Kyoto Protocol encourages Annex I countries to promote low carbon sustainable projects in developing countries in exchange for carbon offsets.

Alternatively, the costs under cap-and-trade policies are subjected to uncertainties due to uncertainties about technology, energy markets, and emissions. There are several cost-containment instruments to address cost uncertainties, such as banking, borrowing, safety valve, and allowance reserves. Although carbon offsets are verified to reduce expected compliance costs by providing a surplus of cheap allowances that can be used by Annex I countries to help meet their commitments, they have yet to be studied as a cost-containment instrument. Carbon offsets could potentially be a cost- containment instrument as purchasing carbon offsets during instances of high carbon price volatility could potentially provide some relief from high prices.

This paper analyzes the effect of carbon offsets on carbon prices, specifically under carbon price uncertainty. I use carbon offsets from abatement activities that reduce emissions from deforestation and forest degradation (REDD) as a case study example. My results show that carbon offsets reduce upside costs and thus can be an alternative cost-containment instrument, but cost-effectiveness can be limited by supply uncertainties, offset purchasing restrictions, emission target stringency and competition over demand. Carbon offsets, such as REDD, can serve as a flexibility instrument for developed nations, encourage global participation in reducing GHG emissions, and provide sustainable development support to developing nations.

Carbon Permit Prices in the European Emissions Trading System: A Stochastic Analysis

The Emission Trading Scheme (ETS) is a cornerstone for European efforts to reduce greenhouse gas emissions, and in its test phase will operate from 2005-2007. It is a cap-and-trade system where an aggregate cap on emissions is set by the respective government agencies to define the total number of emissions allowances. Each allowance gives the owner the right to emit one unit (usually one ton) of emissions. Covered establishments that exceeded the limits may buy emissions credits from entities with allowances they do not need to use themselves. One key feature of this system is that the amount of emissions is capped whereas the permit prices are uncertain. These permit prices are determined by economic conditions, generally, stronger economic growth means a higher permit price.
The objective of this thesis is to understand uncertainty in permit prices under the system, by determining the likelihood that permit prices will fall within a given range. This is accomplished through stochastic analysis simulation of a computable general equilibrium model of the world economy with country-level detail most of the key members of the original 15 member EU plus the 10 accession countries. Economic parameters treated as stochastic in the simulations were labor productivity growth, share of new capital vintaged, the rate of autonomous energy efficiency improvement, the elasticity of substitution between energy and non-energy composites, and oil/gas prices. Information on the likely range of future permit prices will allow operators of covered establishments to decide on the extent to which they should buy permits or invest in emissions reduction technologies possible reducing emissions below their cap, allowing them to sell allowances. While some abatement activities may involve only changes in operation and management of facilities, other may involve longer-term investment. These abatement decisions boil down to basic investment problems. How should entities affected by the ETS plan their investment policies, such that they can minimize costs? To answer this question firms need an estimate of likely future permit prices.
Results were that a zero carbon price occurred with a probability of 28-48% across variants of the Monte Carlo simulations. The mean value for the carbon prices was about $0.40 per ton of carbon, and the maximum price across the variants ranged from about $3.50 to somewhat over $6.00 per ton carbon. The implication for firms is that costly abatement investments appear difficult to justify, except to the extent that firm’s are looking beyond the ETS period when carbon permit prices would rise further.

Causal Reasoning and Goal Setting: A Comparative Study of Air Pollution, Antitrust and Climate Change Policies

Apart from conventional interest-based studies of regulatory policy, the structure of policy design itself is vital to explaining the long-run robustness of policy choices. Causal reasoning and goal setting act as a framework for assessing these choices. Linking policy instruments to the goals they seek to accomplish will be problematic, particularly if linkages are obscured by uncertainties, and inferences are complicated by non-linearities, feedbacks, and differences in the causal inferences drawn by experts and the public. Somewhere in the middle of this causal chain, policy-makers must choose the stages at which to insert both operational goals and policy instruments. Policy choice is rarely a stark one between one causal stage and the next, but instead involves constructing a portfolio of strategies and deciding how to assign relative weights to alternative causal stages without creating too many contradictions or overlaps. In following policy solutions over time, the sequencing of policy design is found to be important in establishing robust policies. Conflicting demands emerge to relate policies to both outcomes and causes, subject to a host of intervening considerations regarding the efficiency of policy choice. These tradeoffs are not static. Causal knowledge that had previously resided only in isolated expert communities will be diffused, albeit slowly and imperfectly, to policy-makers, the judiciary, and the public, leading to changes in perceptions of problems and hence solutions. Policy design that ignores more complicated expert causal

 

(cont.) Moving towards greater reliance on expert knowledge is clearly desirable, the key question this dissertation seeks to explore is the rate at which such a move can be made without threatening the legitimacy of a program. The three cases explored here, air pollution, antitrust, and climate change each presents a different set of actors, forum for regulation, and historical legacy. Each poses a dilemma for policy-makers over how to intervene credibly and effectively. The air pollution case and antitrust cases both offer over a century of experience with policy design over multiple jurisdictions. Lessons from history highlight the importance of: experimenting at early stages; tying goals, not instruments, to outcomes; placing instruments at many different causal stages; introducing expert understandings slowly; and anticipating long delays for adaptation or reform. Finally, the difficult case of climate change is presented and the lessons for causal reasoning and goal setting are applied in the hopes of identifying plausible alternative climate policies.

Changes in Atmospheric Constituents and in Radiative Forcing

About the book: This report has been produced by some 600 authors from 40 countries, over 620 experts and a large number of government reviewers. Providing insights into the effects of human activity on the atmosphere, and containing an evaluation of observed climatic changes using the latest measurement techniques, the report also includes a detailed review of climate change observations and modelling for every continent as well as the first probabilistic evaluation of climate model simulations.

Changes in Sea-Level Associated with Modifications of the Mass Balance of the Greenland and Antarctic Ice Sheets Over the 21st Century

Changes in runoff from Greenland and Antarctica are often cited as one of the major concerns linked to anthropogenic changes in climate. The changes in mass balance, and associated changes in sea-level, of these two ice sheets are examined by comparing the predictions of the six possible combinations of two climate models and three methods for estimating melting and runoff. All models are solved on 20 and 40 km grids respectively for Greenland and Antarctica. The two temperature based runoff parameterizations give adequate results for Greenland, less so for Antarctica. The energy balance based approach, which relies on an explicit modelling of the temperature and density structure within the snow cover, gives similar results when coupled to either climate model. The Greenland ice sheet, for a reference climate scenario similar to the IPCC's IS92a, is not expected to contribute significantly to changes in the level of the ocean over the 21st century. The changes in mass balance in Antarctica are dominated by the increase in snowfall, leading to a decrease in sea-level of 4 cm by 2100. The range of uncertainty in these predictions is estimated by repeating the calculation with the simpler climate model for seven climate change scenarios. Greenland would increase the level of the oceans by 0 - 2 cm, while Antarctica would decrease it by 2.5 - 6.5 cm. The combined effect of both ice sheets lowers the sea-level by 2.5 - 4.5 cm over the next 100 years, this represents a 25% reduction of the sea-level rise estimated from thermal expansion alone. This surprisingly small range of uncertainty is due to cancellations between the effects of the two ice sheets. For the same reason, the imposition of the Kyoto Protocol has no impact on the prediction of sea-level change due to changes in Greenland and Antarctica, when compared to a reference scenario in which emissions are allowed to grow unconstrained.

Changes in the Water and Energy Cycles of the American Midwest

Prediction and understanding of the regional impact of climate change in the American Midwest is of critical importance to agriculture, economy, and society. In particular, predicting the sign and magnitude of the future change in soil moisture conditions is a significant research challenge. During the summer, the input of water to the regional soil moisture (rainfall) is significantly smaller than the output from the same system (evaporation plus surface runoff). This deficit is currently supplied by drawing from the stored soil water in the saturated and unsaturated zones. Therefore, the fundamental research question raised is what will happen to the magnitude of this deficit in the coming decades? If this deficit increases significantly, e.g. due to a significant increase in evaporation, dry soil moisture conditions would develop every year at the end of the summer season. Predicting the magnitude of this deficit under climate change scenarios would require the use of models that are capable of simulating not only the right current climatology of rainfall, evaporation, and runoff, but also the right sign and magnitude of the sensitivity of these processes to climate change. Observations of the water cycle and surface energy balance from the Illinois State Water Survey and FLUXNET will be used to characterize the current climatology in Illinois and examine the sensitivity of latent heat flux to changes in available energy. Implications of the results from regional climate model simulations will be discussed in the context of global climate change and future agricultural productivity.

Chapter 3: The U.S. SO2 Cap-and-Trade Programme

The U.S. SO2 cap-and-trade program was established as a result of the enactment of the 1990 Clean Air Act Amendments (1990 CAAA) under the authority granted by Title IV, which included several measures to reduce precursor emissions of acid deposition.2 The SO2 component consisted of a two-phase, cap-and-trade program for reducing SO2 emissions from fossil-fuel burning power plants located in the continental forty-eight states of the United States. During Phase I, lasting from 1995 through 1999, electric generating units larger than 100 MWe in generating capacity with an annual average emission rate in 1985 greater than 2.5 pounds of SO2 per million Btu of heat input in 1985 (hereafter, #SO2/mmBtu) were required to reduce emissions to a level that would be, on average, no greater than 2.5 #SO2/mmBtu. In Phase II, beginning in 2000 and continuing indefinitely, the program was expanded to include fossil-fuel electricity generating units greater than 25 MWe, or virtually all fossil-fuel power plants in the United States. Emissions from these affected units are limited, after accounting for any allowances banked from Phase I, to an annual cap of 8.9 million tons, or about half of total electric utility SO2 emissions in the early 1980s. The Phase II cap is equivalent to an Ex Post Evaluation: US SO2 Program 2 average emission rate of 1.2 #SO2/mmBtu, when divided by the mid-1980s level of heat input at fossil-fuel burning power plants.

Chapter 6: Modelling

About the book: This unique volume summarizes and integrates more than a decade of atmospheric chemistry research, carried out under the auspices of the International Global Atmospheric Chemistry (IGAC) Project of the International Geosphere-Biosphere Programme (IGBP). It is part of a series being written by each of the IGBP core projects. During the period under consideration, great progress has been made in the science, computing, modelling and observational techniques; methods have also improved. Suggestions for the highest priority research for the next decade are made.

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