Sonja Peterson

Marginal abatement cost curves in general equilibrium: The influence of world energy prices

Marginal abatement cost curves (MACCs) are a favorite instrument to analyze international emissions trading. This paper focusses on the question of how to define MACCs in a general equilibrium context where the global abatement level influences energy prices and in turn national MACCs. We discuss the mechanisms theoretically and then use the CGE model DART for quantitative simulations. The result is, that changes in energy prices resulting from different global abatement levels do indeed affect national MACCs. Also, we compare different possibilities of defining MACCs - of which some are robust against changes in energy prices while others vary considerably.

Emissions trading, CDM, JI, and more: The climate strategy of the EU

The objective of this paper is to assess the likely allocation effects of the current climate protection strategy as it is laid out in the National Allocation Plans (NAPs) for the European Emissions Trading Scheme (ETS). The multi-regional, multi-sectoral CGE-model DART is used to simulate the effects of the current policies in the year 2012 when the Kyoto targets need to be met. Different scenarios are simulated in order to highlight the effects of the grandfathering of permits to energy-intensive installations, the use of the project-based mechanisms (CDM and JI), and the restriction imposed by the supplementarity criterion.

The EU Emissions Trading Scheme. Allowance Prices, Trade Flows, Competitiveness Effects

The upcoming European Emissions Trading Scheme (ETS) is one of the more controversial climate policy instruments. Predictions about its likely impact and its performance can at present only be made to a certain degree. As long as the National Allocations Plans are not finally settled the overall supply of allowances is not determined. In this paper we will identify key features and key impacts of the EU ETS by scanning the range of likely allocation plans using the simulation model DART. The analysis of the simulation results highlights a number of interesting details in terms of allowance trade flows between member countries, of allowance prices, and in terms of the role of the accession countries in the ETS.

Explaining European Emission Allowance Price Dynamics: Evidence from Phase II

Abstract We empirically investigate potential determinants of the allowance price dynamics in the European Union Emission Trading Scheme during Phase II. In contrast to previous studies, we place particular emphasis on the fuel price selection. We show that results are extremely sensitive to choosing different price series of potential determinants, such as coal and gas prices. In general, only the influence of economic activity in Europe and hydropower provision in Norway is robustly explaining allowance price dynamics. The influence of fuel switching on allowance prices and, therefore, equalization of marginal abatement costs - in particular in the long run - is still rather small.

Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature

Since 2005, the EU ETS has provided a market-based price signal for European carbon emissions. This article reviews the literature on the formation of carbon allowance prices during phase II of the EU ETS. A consensus has emerged in the literature that allowance prices are driven by fuel prices and other variables that affect the expected amount of abatement required to meet the EU ETS emissions cap. However, this relationship is not robust, most likely because the relevant abatement technologies change with the economic conditions in which they operate. There is evidence that models that explicitly account for uncertainty about the future demand and supply of allowances are better at explaining allowance price variation during certain periods. However, our understanding of the level of the allowance price remains poor. We cannot say with any degree of confidence whether the allowance price is “right,” in the sense that it reflects marginal abatement costs, or whether there is a price wedge caused by uncertainty, transaction costs, or price manipulation. Nevertheless, we find that the EU ETS market has matured in phase II compared with phase I and that banking of allowances has induced the market to incorporate the future scarcity of allowances and, as intended, to smooth the effect of temporary shocks. We argue that further research is needed in several key areas to increase our understanding of the emissions allowance market provided by the EU ETS. ( JEL: Q56, Q58)

An economic and environmental assessment of carbon capture and storage (CCS) power plants: a case study for the City of Kiel

In the not too distant future several power plants throughout Europe will have to be replaced and the decision has to be made whether to build coal-fired power plants with carbon capture and storage (CCS). In a study for the city of Kiel in northern Germany only an 800 MW coal power plant reaches a required minimum for rentability. This study looks at an additional economic and environmental evaluation of a coal plant with CCS. We find that in two out of three carbon and energy price scenarios integrated gasification combined cycle (IGCC) plants with CCS have the greatest rentability. Pulverised coal (PC) plants with CCS can only compete with other options under very favourable assumptions. Life-cycle emissions from CCS are less than 70% of a coal plant – compared with at least more than 80% when only considering direct emissions from plants. However, life-cycle emissions are lower than in any other assessed option.

Reaching a climate agreement: compensating for energy market effects of climate policy

Because of large economic and environmental asymmetries among world regions and the incentive to free ride, an international climate regime with broad participation is hard to reach. Most of the proposed regimes are based on an allocation of emissions rights that is perceived as fair. Yet, there are also arguments to focus more on the actual welfare implications of different regimes and to focus on a ‘fair’ distribution of resulting costs. In this article, the computable general equilibrium model DART is used to analyse the driving forces of welfare implications in different scenarios in line with the 2 °C target. These include two regimes that are often presumed to be ‘fair’, namely a harmonized international carbon tax and a cap and trade system based on the convergence of per capita emissions rights, and also an ‘equal loss’ scenario where welfare losses relative to a business-as-usual scenario are equal for all major world regions. The main finding is that indirect energy market effects are a major driver of welfare effects and that the ‘equal loss’ scenario would thus require large transfer payments to energy exporters to compensate for welfare losses from lower world energy demand and prices. Policy relevance A successful future climate regime requires ‘fair’ burden sharing. Many proposed regimes start from ethical considerations to derive an allocation of emissions reduction requirements or emissions allowances within an international emissions trading scheme. Yet, countries also consider the expected economic costs of a regime that are also driven by other factors besides allowance allocation. Indeed, in simplified lab experiments, successful groups are characterized by sharing costs proportional to wealth. This article shows that the major drivers of welfare effects are reduced demand for fossil energy and reduced fossil fuel prices, which implies that (1) what is often presumed to be a fair allocation of emissions allowances within an international emissions trading scheme leads to a very uneven distribution of economic costs and (2) aiming for equal relative losses for all regions requires large compensation to fossil fuel exporters, as argued, for example, by the Organization of Petroleum Exporting Countries (OPEC).