TETRIS
Work Package 6 – Quantitative Analysis
of International Emissions Trading
Christoph Böhringer, Ulf Moslener, and Niels Anger
TETRIS Final Conference,
Brussels, November 30, 2006
1
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 topdown CGE framework accounting for


Transaction costs

CDM-specific investment risks

Technology transfer
Quantitative assessment of economic and
emission impacts triggered by climate policies
Workpackage leader:
• ZEW
Workpackage participants:
• Ecoplan
• CCAP
• ECN
• NTE
2
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
3
Implementation of bottom-up CDM supply
function (including transaction costs and risk)
Cost per ton of CO 2 (US$/t)
4,0
3,0
MAC
2,0
MAC+TC
1,0
MAC+TC+RI
SK
0,0
500
700
900
1100
1300
1500
-1,0
Abatement potential (Mt CO 2)
Key: MAC – marginal abatement cost, TC – transaction costs, R – investment risk
General Equilibrium Model: PACE
PACE (Policy Assessment based on Computable Equilibrium):
– Multi-sector, multi-region model of the global economy
– Incorporation of market interactions and income closures
– Calibration of technologies and preferences based on empirical data
5
Model regions
EU-27 Member States
Rest of ratifying Annex B parties
Russian Federation
Rest of Former Soviet Union
Japan
Canada
CDM host countries
China incl. Hong Kong
India
Rest of East South Asia
Brazil
Central + South America
South Africa
Climate policy scenarios
Central scenario dimensions:
Regulatory scheme
CDM
access
Transaction
costs
Investment
risk
ET
Emissions trading
No
No
No
ET_CDM
Emissions trading
Yes
No
No
ET_CDM_TC_R
Emissions trading
Yes
Yes
Yes
Scenario
Key: ET – emissions trading, TC – transaction costs, R – investment risk
Additional scenario dimensions:
Permit supply and
demand restrictions:
 No Hot Air (No „Hot Air“ supply from FSU)
 Additionality (Restricted CDM projects)
 Supplementarity (Limit on CER imports)
International CO2 permit price (US$/t CO2)
12,00
10,00
8,00
ET
ET_CDM
6,00
ET_CDM_R_TC
4,00
2,00
0,00
Hot Air
No Hot Air
Add - HA
Key: HA – hot air, Add – additionality
Add - no HA
Sensitivity analysis for CO2 permit price
1.6
Illustration:
Scenario ET_CDM_TC_R without
1.4
hot air  CO2 price = 0.98 US$/tCO2)
max=1.44
90% quantile = 1.32 US$/tCO2
1.2
Technique:
Monte-Carlo simulations on key
elasticities
Mean = 1.054
1
Median = 0.98
10% quantile = 0.89 US$/tCO2
0.8
min=0.83
0.6
0.4
0.2
0
Emission reduction of EU-27 (% vs. BAU)
12
10
8
ET
ET_CDM
6
ET_CDM_TC_R
4
2
0
HA
No HA
Add (HA)
Addd (no Supp (HA) Supp (no
HA)
HA)
Key: HA – hot air, Add – additionality, Supp – supplementarity
Welfare loss for EU-27
(% change in equivalent variation)
0.016
0.014
0.012
0.01
ET
ET_CDM
ET_CDM_TC_R
0.008
0.006
0.004
0.002
0
HA
No HA
Add NA
Add No Supp HA Supp No
HA
HA
Key: HA – hot air, Add – additionality, Supp – supplementarity
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
12
Implemented CDM projects (volume share by region)
No CDM restriction
Additionality
CDM Potential
100%
80%
Rest of World
S Africa
60%
Rest SE Asia
India
40%
C&S America
China
20%
Brazil
Potential
ET_CDM_TC_R
ET_CDM
ET_CDM_TC_R
ET_CDM
0%
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 Analysis
of International Emissions Trading
Christoph Böhringer, Ulf Moslener and Niels Anger
TETRIS Final Conference,
Brussels, November 30, 2006
16