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TETRIS

TETRIS. Work Package 6 – Quantitative Analysis of International Emissions Trading. Christoph Böhringer, Ulf Moslener, and Niels Anger. TETRIS Final Conference, Brussels, November 30, 2006. Objectives.

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TETRIS

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  1. TETRIS Work Package 6 – Quantitative Analysisof International Emissions Trading Christoph Böhringer, Ulf Moslener, and Niels Anger TETRIS Final Conference, Brussels, November 30, 2006

  2. 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 Workpackage leader: • ZEW • Ecoplan • CCAP • ECN • NTE Workpackage participants:

  3. 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

  4. Implementation of bottom-up CDM supply function (including transaction costs and risk) Key: MAC – marginal abatement cost, TC – transaction costs, R – investment risk

  5. 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

  6. Model regions

  7. Climate policy scenarios Central scenario dimensions: Key: ET – emissions trading, TC – transaction costs, R – investment risk Additional scenario dimensions: • No Hot Air (No „Hot Air“ supply from FSU) • Additionality (Restricted CDM projects) • Supplementarity (Limit on CER imports) Permit supply and demand restrictions:

  8. International CO2 permit price (US$/t CO2) Key: HA – hot air, Add – additionality

  9. Sensitivity analysis for CO2 permit price Illustration: Scenario ET_CDM_TC_R withouthot air  CO2price = 0.98 US$/tCO2) max=1.44 90% quantile = 1.32 US$/tCO2 Technique: Monte-Carlo simulations on key elasticities Mean = 1.054 Median = 0.98 10% quantile = 0.89 US$/tCO2 min=0.83

  10. Emission reduction of EU-27 (% vs. BAU) Key: HA – hot air, Add – additionality, Supp – supplementarity

  11. Welfare loss for EU-27 (% change in equivalent variation) Key: HA – hot air, Add – additionality, Supp – supplementarity

  12. Implementation of projects • Implementation of CDM projects based on numerical simulation results • Procedure (linkage of model and CDM database): • Simulation of CO2permit prices for alternative policy scenarios • Derivation of marginal abatement cost levels on the project-based CDM supply curves (CDM database) • Identification of implemented projects (number / volume) within the CDM database

  13. Implemented CDM projects (volume share by region) No CDM restriction Additionality CDM Potential

  14. 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

  15. 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

  16. 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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