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TETRIS

Work Package 6 – Quantitative Analysisof International Emissions Trading

Christoph Böhringer, Ulf Moslener, and Niels Anger

TETRIS Final Conference,Brussels, November 30, 2006

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• ZEWWorkpackage leader:

Workpackage participants:• Ecoplan• CCAP• ECN• NTE

Objectives

Develop macroeconomic model (computable general equilibrium – CGE) of international trade and energy use featuring the EU ETS in 2010

Integrate project-based JI and CDM within top-down CGE framework accounting for Transaction costs

CDM-specific investment risks

Technology transfer

Quantitative assessment of economic and emission impacts triggered by climate policies

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Model inputs

GTAP 6 database, EU and DOE energy projections to 2010

EU-27 allowance allocation: NAP II

Project-based CDM cost and potential (work package 2 and 3)

Project-based transaction costs (work package 3) Premium on CER price Upward shift of CDM supply curve

Composite investment risk indicator (work package 1) Risk premium on CER price Upward shift of CDM supply curve: risk lowers expected

return of CDM projects

Implementation of bottom-up CDM supply function (including transaction costs and risk)

-1,0

0,0

1,0

2,0

3,0

4,0

500 700 900 1100 1300 1500

Abatement potential (Mt CO2)

Co

st p

er t

on

of

CO

2 (

US

$/t)

MAC

MAC+TC

MAC+TC+RISK

Key: MAC – marginal abatement cost, TC – transaction costs, R – investment risk

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General Equilibrium Model: PACE

– Multi-sector, multi-region model of the global economy– Incorporation of market interactions and income closures– Calibration of technologies and preferences based on empirical data

PACE (Policy Assessment based on Computable Equilibrium):

Model regions

EU-27 Member States

Rest of ratifying Annex B partiesRussian FederationRest of Former Soviet UnionJapanCanada

CDM host countriesChina incl. Hong KongIndiaRest of East South AsiaBrazilCentral + South AmericaSouth Africa

Climate policy scenarios

ScenarioRegulatory

schemeCDM

accessTransaction

costsInvestment

risk

ET Emissions trading No No No

ET_CDM Emissions trading Yes No No

ET_CDM_TC_R Emissions trading Yes Yes Yes

No Hot Air (No „Hot Air“ supply from FSU) Additionality (Restricted CDM projects) Supplementarity (Limit on CER imports)

Permit supply and demand restrictions:

Key: ET – emissions trading, TC – transaction costs, R – investment risk

Additional scenario dimensions:

Central scenario dimensions:

0,00

2,00

4,00

6,00

8,00

10,00

12,00

Hot Air No Hot Air Add - HA Add - no HA

ET

ET_CDM

ET_CDM_R_TC

International CO2 permit price (US$/t CO2)

Key: HA – hot air, Add – additionality

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6max=1.44

min=0.83

10% quantile = 0.89 US$/tCO2

90% quantile = 1.32 US$/tCO2

Median = 0.98

Mean = 1.054

Sensitivity analysis for CO2 permit price

Technique:Monte-Carlo simulations on keyelasticities

Illustration:Scenario ET_CDM_TC_R withouthot air CO2 price = 0.98 US$/tCO2)

0

2

4

6

8

10

12

HA No HA Add (HA) Addd (noHA)

Supp (HA) Supp (noHA)

ET

ET_CDM

ET_CDM_TC_R

Emission reduction of EU-27 (% vs. BAU)

Key: HA – hot air, Add – additionality, Supp – supplementarity

Welfare loss for EU-27 (% change in equivalent variation)

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

HA No HA Add NA Add NoHA

Supp HA Supp NoHA

ET

ET_CDM

ET_CDM_TC_R

Key: HA – hot air, Add – additionality, Supp – supplementarity

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Implementation of projects

Implementation of CDM projects based on numerical simulation results

Procedure (linkage of model and CDM database):

1. Simulation of CO2 permit prices for alternative policy scenarios

2. Derivation of marginal abatement cost levels on the project-based CDM supply curves (CDM database)

3. Identification of implemented projects (number / volume) within the CDM database

Implemented CDM projects (volume share by region)

No CDM restriction Additionality CDM Potential

0%

20%

40%

60%

80%

100%E

T_C

DM

ET

_CD

M_T

C_R

ET

_CD

M

ET

_CD

M_T

C_R

Po

ten

tial

Rest of World

S Africa

Rest SE Asia

India

C&S America

China

Brazil

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Conclusions (1)

Low permit price and small macroeconomic impacts due to large potentials of cheap CDM permit supply

Given prices for CER futures: Hidden costs of CDM investments?

Transaction costs and investment risk increase permit price, but limited impact on the macroeconomy based on underlying CDM data

Large impact of Additionality criterion, Supplementarity rule and restriction of “Hot-Air” on permit price and adjustment costs

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Conclusions (2)

China, Central+South America and Rest of East South Asia as dominant CDM host regions. Sectoral distribution dominated by Electricity, Agricultural Products and Public Sector Additionality criterion decreases number volume and distribution of CDM projects significantly exclusion of “No-Regret” options

Transaction costs and investment risk deter implementing CDM projects, and change project portfolio in favor of “large-scale” options

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TETRIS

Work package 6 – Quantitative Analysisof International Emissions Trading

Christoph Böhringer, Ulf Moslener and Niels Anger

TETRIS Final Conference,Brussels, November 30, 2006