The Effects on Developing Countries of the Kyoto Protocol and CO2 Emissions Trading
A. Denny Ellerman, Henry D. Jacoby and Annelène Decaux*
Abstract
This paper examines the effect of the Kyoto Protocol on developing economies using marginal abatement curves
generated by MIT’s Emissions Prediction and Policy Assessment model (EPPA). In particular, the paper addresses
how developing countries are affected by the scope of CO2 emissions trading, by various limitations that Annex I
countries might place on emissions trading, by the nature of the Clean Development Mechanism, and by changes
in the international trade flows in conventional goods and services. In general, it is found that developing
countries benefit from emissions trading, both from the new export opportunities and by the lesser distortion of
Annex I economies. This effect is particularly pronounced for energy exporting countries since Annex I countries
are able to substitute cheaper reductions of coal emissions in developing countries for more expensive reductions
of oil emissions within Annex I. The paper also highlights the implications of the apparent inelastic demand for
tradable permits from non-Annex I countries and the conflict between revenue maximization and other goals
assigned to the Clean Development Mechanism.
Contents
1. INTRODUCTION .........................................................................................................1
2. THREE BASIC CASES: No Trading, Annex B Trading and Full Global Trading..............................3
2.1 The Autarkic, No-Trading Case ................................................................................3
2.2 Annex B Trading..................................................................................................4
2.3 Full Global Trading ..............................................................................................6
2.4 Effect of Higher and Lower Economic Growth ..............................................................7
2.5 Per Capita Emissions............................................................................................9
3. IMPORT LIMITATIONS...............................................................................................10
4. CDM “SURCHARGES” AND CARTELIZATION OF SUPPLY ..................................................12
4.1 CDM Surcharges................................................................................................12
4.2 Cartelization of Supply .......................................................................................14
5. INEFFICIENT SUPPLY................................................................................................15
6. INTERNATIONAL TRADE IN ENERGY AND NON-ENERGY GOODS ........................................17
6.1 Trade in Goods with No Emissions Trading ...............................................................18
6.2 Comparing the No-Trading Case with Full Global Trading.............................................20
6.3 Summary .........................................................................................................20
7. CONCLUDING OBSERVATIONS....................................................................................21
8. ACKNOWLEGMENTS.................................................................................................22
9. REFERENCES...........................................................................................................22
APPENDIX A: MARGINAL ABATEMENT CURVES................................................................25
A.1 What are Marginal Abatement Curves and What Do They Represent? ...............................25
A.2 How Can MACs Be Used for Trade Studies?...............................................................25
A.3 How are MACs Generated from CGE Models?............................................................26
A.4 Assessing the “Robustness” of MACs with Regard to the Policy Applied.........................29
A.5 Analytical Approximations: A Simple Tool for Trade Studies........................................30
A.6 Construction of Aggregate Supply and Demand Curves................................................31
APPENDIX B: DATA TABLES..........................................................................................34
* Ellerman is Senior Lecturer at the Sloan School of Management and Executive Director of the MIT Global Change
Joint Program; Jacoby is the William F. Pounds Professor of Management at the Sloan School and Co-Director of
the Joint Program; and Decaux is a candidate for a Master’s degree from MIT’s Technology and Policy Program
and a Research Assistant with the Joint Program.
1
1. INTRODUCTION
The Kyoto Protocol recognizes a strong linkage between CO2 emission reduction goals, emissions
trading, and the role of developing economies. Annex B parties, generally the industrialized
nations, have set targets that, for most, imply a significant reduction of CO2-equivalent emissions
by 2010. The ability and even willingness of Annex B parties to achieve these targets will depend
on the cost of abatement. The cheapest sources of CO2 emission reductions are found, not in the
Annex B countries, but in the developing economies (or non-Annex B parties), which for historic
and equity reasons are not expected to contribute to the global emissions reduction in the near term.
Since the location of CO2 emissions does not matter from a global warming perspective, the
achievement of the Kyoto targets will depend in large part upon the ability of Annex B countries to
substitute cheaper emission reductions in non-Annex B regions for equivalent abatement at home.
In providing a mechanism for this exchange, emissions trading not only reduces the cost of
meeting the Kyoto goals for Annex B parties, but also provides a new source of export earnings
for non-Annex B parties.
Developing country interest in emissions trading is not limited to the potential for new export
earnings. Achieving the goals set at Kyoto will change patterns of consumption and production
within Annex B nations; and these changes will have inevitable effects on the flows of internationally
traded goods. As a result, developing countries will be affected through conventional trade linkages
with the Annex B countries; however, these effects, both favorable and unfavorable, will be
diminished to the extent that emissions trading reduces the cost of achieving the Kyoto targets.
In examining the effects of the Kyoto Protocol upon non-Annex B parties, we assume that the
Annex B goals are met, and we focus in particular on how emissions trading would affect the
developing countries. We refer to emissions trading generically, to include bubbles, joint
implementation, allowance or credit systems, and perhaps other forms yet to be devised. The chief
practical distinction among these forms concerns the transaction cost involved in effecting an
individual trade.
The paper relies heavily upon the use of marginal abatement curves (MACs). These curves
represent the marginal cost of reducing carbon emissions by different amounts within an economy.
The details of their construction, and the elaboration of the aggregate demand and supply curves
for carbon permits which are drawn from them, are explained in Appendix A. The MACs used
here are generated using MIT’s Emissions Prediction and Policy Assessment (EPPA) model (Yang
et al. 1996). This is a multi-sectoral, multi-regional, computable general equilibrium (CGE) model
of global economic activity, energy use and carbon emissions. The underlying model simulates real
emission reductions, so that our analysis implicitly assumes that the “additionality” criterion
established in the Kyoto Protocol [Arts. 6.1(b) and 12.5(c)] is satisfied. We do not attempt to
address the considerable political and practical problems of measurement and verification that are
associated with this criterion, but we will account for the effect of these problems in a subsequent
section.1
1 UNCTAD (1998) contains an excellent discussion of these issues.
2
The main body of the paper consists of five sections. Section 2 uses the MACs to analyze three
basic cases: no emissions trading, emissions trading limited to Annex B parties (including the
Former Soviet Union), and full global trading. Results are presented in graphical form in the text,
and the regional detail—in terms of abatement, costs, emission permit trade and prices for all the
cases discussed—is presented in tabular form in Appendix B.
The next three sections address the effects of various departures from the three basic cases. The
first departure, in Section 3, is the effect of limitations on imports of emission permits, as might
correspond to the “supplementarity” criterion included in the Kyoto Protocol [Arts. 6.1(d) and 17]
or to the recent call by the EU environmental ministers for a “concrete ceiling” on emissions
trading. Section 4 evaluates the effect of surcharges on emission permits generated under the Clean
Development Mechanism (CDM), as also provided in the Kyoto Protocol [Art. 12.8], and of noncompetitive
pricing. The third departure, discussed in Section 5, is the effect of a smaller supply of
permits from the non-Annex B regions than is indicated by EPPA’s assumptions of complete
economic rationality and zero transaction costs, which we term “inefficient supply.”
In Sections 2 through 5, the measure of welfare used is the total direct resource cost required to
meet the emissions constraint. As explained in Appendix A, for any country this cost is the area
under its marginal abatement curve up to any point of constraint, corrected for any purchase or sale
of emissions permits. This is the conventional measure which is generated using the MAC approach.
However, because the MACs are generated at the country level, they are not able to take account of
effects that are mediated through international trade in energy or other goods. As shown in Appendix
A, the MAC results themselves are not sensitive to trade effects. Nevertheless, these effects will
influence sub-national details, such as patterns of trade in particular goods and activity at the sectoral
level. To explore these effects, we depart from the MAC analysis in Section 6, and present results
taken directly from the EPPA model. In Section 7 we offer some concluding observations.
In conducting our analysis, we will make frequent reference to the twelve regions represented
in EPPA, which are listed below with the model’s acronyms. The CO2 emission reductions
required of Annex B regions are calculated as the differences between EPPA’s predicted emissions
for these regions in 2010 and the goals established at Kyoto for the constituent parties, which are
generally stated as a percentage of 1990 emissions, as indicated in Table 1.2
Definition of Regions in the EPPA Model
ANNEX B REGIONS2 NON-ANNEX B REGIONS
USA: USA EEX: Energy Exporting Countries
JPN: Japan CHN: China
EEC: European Union (EC-12 as of 1992) IND: India
OOE: Other OECD Countries DAE: Dynamic Asian Economies
EET: Eastern Europe BRA: Brazil
FSU: Former Soviet Union ROW: Rest of World
2 Under Kyoto Protocol accounting, as best it is understood, this procedure involves the implicit assumption that all
other greenhouse gases are also reduced by the same percentage below the appropriate baseline value for each. No
costs are included for these controls in our study, nor is any account taken of possible carbon sinks.
3
Table 1. Emissions Levels Corresponding to Kyoto Commitments
USA JPN EEC OOE EET FSU Non-Annex B
Reference emissions 1990 (Mton) 1362 298 822 318 266 891 2022
Reference emissions 2010 (Mton) 1838 424 1064 472 395 763 4142
Kyoto commitments / 1990 93% 94% 92% 94.5% 104% 98% NA
Hence Emissions Target in 2010 (Mton) 1267 280 756 301 273 873 4142
i.e. Reduction / ref (Mton) 571 144 308 171 118 0 NA
i.e. Reduction / ref (%) 31% 34% 29% 36% 30% 0 NA
“hot air” (Mton) 0 0 0 0 0 111 NA
Only five of the six EPPA regions encompassing Annex B countries are constrained by the
commitment made at Kyoto3 and these five will subsequently be termed the Kyoto-constrained
regions. For the sixth Annex B region, the FSU, emissions are predicted to be below the aggregate
level to which the principal nations constituting the FSU¾Russia, the Ukraine, and the
Baltics¾committed at Kyoto. The difference between the FSU commitment and predicted
emissions is controversially called “hot air,” but in our analysis we assume that it constitutes a
“right to emit” that can be exported. For the non-Annex B regions, as well as for the FSU, any
reduction from 2010 reference emissions also generates a permit for export to the Kyotoconstrained
regions.
2. THREE BASIC CASES: No Trading, Annex B Trading and Full Global Trading
Three basic cases are used to illustrate the effects of the Kyoto Protocol and the role of emissions
trading. The first case is an autarkic one in which Annex B parties meet their Kyoto commitments
without any emissions trading. As a result, the FSU and non-Annex B regions are affected only
through the prices and quantities of goods traded with the Kyoto-constrained regions. In the
second case, Annex B parties (including the FSU) trade emission permits among themselves.
Emissions trading within Annex B reduces the costs of the Kyoto commitment for the constrained
regions, and the FSU finds a new source of export revenue; but non-Annex B countries will
continue to be affected only through conventional trade linkages. The third basic case examines
emissions trading on a global scale in which non-Annex B countries join the FSU in earning export
revenue from supplying permits to Annex B countries. Further variations of these basic cases will
be developed in subsequent sections, but these three frame the salient alternatives.
2.1 The Autarkic, No-Trading Case
Figure 1 presents the MACs and the costs associated with the carbon emission reductions
required of each of the Kyoto-constrained regions (excluding the FSU) when there is no emissions
3 The Kyoto Protocol refers to the targets established for Annex B parties as “legally binding commitments,”
although neither the legal structure nor the sanctioning mechanism are evident. In this paper, we use the terms
“goals,” “targets,” and “commitments” more or less interchangeably.
4
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
Abatement Cost
$34 billion
OOE
Abatement Cost
$13 billion EEC
Abatement Cost
$30 billion USA
Abatement Cost
$38 billion
Total Cost:
$120 billion
EET
Abatement Cost
$5 billion
Figure 1. Annex B Regions Meeting their Kyoto Commitment, No Trading. (Table A)
trading.4 The diamond symbols on the MACs indicate, on the horizontal axis, the quantity of
abatement required of each region (cf. Table 1), and, on the vertical axis, the shadow price of
carbon for the region. The shadow price is the marginal cost for the last ton abated. The autarkic
marginal cost of abatement for Japan ($584/ton) is much higher than the marginal costs for the
EEC ($273), the OOE ($233), the USA ($186), or the EET ($116). The areas under the curves
represent the total costs of abatement for each region, which sum to $120 billion.5 The details are
shown in Appendix B, Table A.
With no emissions trading, there are no export earnings for the FSU or the non-Annex B
regions. None of these regions would have any incentive to abate in order to generate “rights to
emit” for export; and, of course, the FSU would not be able to export its “hot air.”
2.2 Annex B Trading
Figure 2 shows the effect of Annex B trading on the Kyoto-constrained regions. At the market
clearing price of $127/ton, the OECD regions (USA, EEC, JPN, OOE) are importers of permits and
the EET and FSU are exporters. As an unconstrained Annex B party, the FSU accounts for virtually
all of the exports (98%). As shown in Figure 3, about a third of these consist of “hot air,” with a
cost of zero; but the remaining exports are generated by abatement undertaken to earn additional
export profits up to the point where marginal abatement cost equals the market price. It costs the
FSU $10 billion to abate 234 megatons (Mton), but the permits can be sold for $30 billion for a net
gain of $20 billion. When added to the $14 billion earned for exporting 111 Mton of the unused
Kyoto entitlement, the FSU’s total gain from emissions trading is $34 billion.
4 The MACs for the OOE and EET are virtually identical and are therefore superimposed in Figure 1.
5 All prices and costs are in 1985 US$. Multiplication by 1.5 converts these figures into current (1998) US dollars.
5
$127
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
Savings:
$19 billion
OOE
Savings:
$2 billion
EEC
Savings:
$7 billion
USA
Savings:
$3 billion
Total Savings for
Kyoto-Constrained
Regions: $32 billion
EET
Savings:
$0 billion
Kyoto
Trading
Figure 2. Annex B Meeting their Kyoto Commitment, No Trading/Trading. (Table B)
For the five Kyoto-constrained regions
depicted on Figure 2, the cost of meeting the
Kyoto commitment is reduced by $32 billion. This
is the area of the hatched triangles, which represent
costly domestic abatement avoided by importing
permits for the four OECD regions and the export
earnings for the EET. From the standpoint of
world resource use, the aggregate cost of meeting
the Kyoto commitments is much lower with
Annex B trade ($54 billion) than without ($120
billion). The total gains from emissions trading
are$66 billion, split about evenly between the FSU
FSU
P
Q
$127
Optimal quantity of permits traded (345 Mton)
Emissions
Reduction
(234 Mton)
HOT AIR
(111 Mton)
Figure 3. Trade with FSU: The “Hot Air”
Effect.
($34 billion) and the OECD + EET ($32 billion).
The distribution of the reduction in costs (that is, the gains from emissions trading for the
Kyoto-constrained regions) is distributed roughly in proportion to autarkic marginal cost. The two
regions with the highest autarkic marginal costs, Japan and the EEC, benefit the most from traded
permits. Japan imports 66% of its reduction requirement and reduces its cost by $19 billion. The
EEC imports 35% of its reduction requirement and reduces its cost by $7 billion. These two
regions account for about one-third of the total emission reduction requirement for the five Kyotoconstrained
regions, and about five-sixths of the gains from emissions trading for these regions
accrue to them. The other three regions are characterized by autarkic marginal costs much closer to
the Annex B market price; consequently, they trade much less. The USA and OOE are importers
6
for 19% and 25% of their respective requirements, and the EET reduces emissions by 5% more
than required in order to export permits. The gains for these regions, which account for two-thirds
of the total reduction requirement, total $5 billion, about a sixth of the gains from trading for the
Kyoto-constrained regions.
This distribution of the gains from trade reflects an important feature of emissions trading.
Regions with autarkic marginal cost farther from the trading equilibrium will import or export more
(and benefit more) than those regions with autarkic marginal cost closer to the trading equilibrium.
Thus, Japan and the EEC benefit most from emissions trading among the importers, as does the
FSU, not just because of the “hot air,” but also because its autarkic marginal cost ($0/ton) is far
from the market price.
2.3 Full Global Trading
To illustrate full global trading, we rely on aggregate supply and demand curves for emissions
permits (not abatement), as explained in the Appendix A and illustrated in Figure 4. These curves
indicate the total quantities of permits that would be supplied or demanded at various price levels in
a given market. In Figure 4, there is only one demand curve because the Kyoto-constrained
regions are the same in both the Annex B and the global markets. Only the supply changes,
reflecting the large amount of low-cost carbon abatement that becomes potentially available with the
shift to global trading. The ample supply of permits from non-Annex B regions results in a market
price that is much lower ($24/ton) than in the Annex B trading case. The total cost of reducing
global CO2 emissions to achieve the Kyoto goals is reduced dramatically: $11 billion vs.
$54 billion or $120 billion in the other two cases!
At this price, the Kyoto-constrained regions depend far more on imports than when trading
was restricted to Annex B regions only. In the aggregate, 71% of OECD + EET commitments are
met by importing emission permits from non-constrained regions; and the percentage reliance upon
imports reflects autarkic marginal cost: Japan, 92%; EEC, 76%; USA, 68%; OOE, 66% and
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
World Trading
Demand
Supply
Annex B Trading
Kyoto Cap
Figure 4. Aggregated Supply and Demand Curves for 2010 under Kyoto Constraints. Annex B
Trading / World Trading. (Table C)
7
EET, 56%. On the suppliers’ side, three countries account for the bulk of exports: China (47%),
the FSU (23%) and India (11%), hence 81% altogether. Whether because of relatively small size
or high relative abatement costs, the remaining four non-Annex B regions are small suppliers of
emission permits to the Annex B regions.
With full global trading, the gains from emissions trading are much greater for the Kyotoconstrained
regions ($94 billion vs. $32 billion with Annex B trading). The non-Annex B regions
gain $10 billion by exporting permits, but their gains are markedly less than those of the Kyotoconstrained
regions. The FSU is the only party that is made worse off by this widening of the
market. At $24/ton, the FSU abates about half as much as before, (101 Mton), and the “hot air” is
worth much less. As a result, the FSU’s net gain ($4 billion) in the global market is much less
than its $34 billion gain when it does not compete with the non-Annex B regions.
The distribution of the gains from emissions trading in the global market illustrates again the
feature of emissions trading we just noted: regions whose autarkic marginal cost is further from the
equilibrium price benefit more than regions whose marginal cost is closer to that price. In this
global trading case, the clearing price is much closer to the suppliers’ autarkic marginal cost
($0/ton) than it is to the autarkic marginal cost of any of the importers.
2.4 Effect of Higher and Lower Economic Growth
The three basic cases, and those to be presented hereafter, provide point estimates of prices,
quantities and costs. In this section, we briefly note the effect of different assumptions about
economic growth, namely, that it is 10% higher and 10% lower than in the reference EPPA
projection for all regions. Figure 5 shows the effect of higher and lower growth rates for
illustrative Kyoto-constrained regions (JPN, EEC and USA), and Figure 6 shows the effects on
aggregate supply and demand for permits in the Annex B and full global markets.
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
EEC
USA
Kyoto
Kyoto low
Kyoto high
Figure 5. Effect of Lower and Higher Growth Rates (± 10%) on the Kyoto Commitment for JPN,
EEC, USA. (Tables A' to C')
8
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply Annex B
Trading
Supply World
Trading
Demand
Kyoto Cap
low high
high
low high
low
Figure 6. World Supply and Demand in 2010 under Kyoto Constraints. Annex B Trading / World
Trading — Low and High Scenarios. (Tables A'' to C'')
The effects of higher or lower growth on emissions is typically fairly small, always less than
± 5%, but the Kyoto commitment is fixed so that the effect on the required reduction is amplified.
For instance, for the Kyoto-constrained regions, the variation in total required emission is ± 13 to
14%. Finally, the change in total costs, without trading, is even greater (± 31–36%), because the
most expensive abatement, that on the margin, represented by the hatched area in Figure 5, is what
is being increased or decreased by the variation in economic growth.
When aggregated into demand and supply curves for permits, the variation in economic growth
has a large effect on demand, but not much on supply since most of the supply comes from
unconstrained regions, the FSU or the non-Annex B countries. The chief effect upon supply
within the relevant price range is through the influence on hot air. Higher growth reduces hot air
and shifts the supply curve inward; and conversely, for lower economic growth.
The effect of higher or lower economic growth on the price and quantities of traded permits is
very different in the Annex B and full global trading markets. In the former, the volumes traded
change very slightly (± 12 Mton), but the price varies greatly (± $40). In a market limited to
Annex B regions, most of the incremental effort required by higher or lower growth translates into
more or less domestic abatement. In contrast, for full global trading, the aggregate supply curve is
flatter, so that the variation in the volume of traded permits is greater (± 120 Mton) but the
variation in price much less (± $6).
The variation in total cost for the Kyoto-constrained regions is slightly greater in the trading
cases than in the non-trading case (± 36–42% vs. ± 31–36%) because with lower or higher
growth, greater or smaller amounts of hot air from the FSU enter the trading system.
9
2.5 Per Capita Emissions
As a further summary statistic, the effect of the Kyoto commitment and of the scope of trading
can be shown in per capita terms. Table 2 provides full regional detail, but the essential features can
be grasped by reference to Figure 7, where per capita emissions in 2010 are shown for the USA,
the five Kyoto-constrained regions as a group, the FSU, the non-Annex B regions, and the world.
The Kyoto commitment reduces per capita emissions in all the Kyoto-constrained regions;
however, the reduction is less severe, the greater the scope of trading. In full global trading, as an
example, per capita emissions are reduced by 14% on a global scale, but by a greater percentage in
the non-Annex B regions since the share of the global emission reduction in the non-Annex B
regions is greater than their share of emissions: the aggregate OECD+EET reduction is 9%, while
the FSU reduction is 13% and the non-Annex B reduction is 18%.
Within the Kyoto-constrained regions, the reduction in per capita emissions varies considerably
depending on the extent to which the region imports permits. At one extreme is Japan, where per
capita emissions would be less by only 2.7% because it imports 92% of its emission reduction
obligation. The greater percentage reductions in the other constrained regions reflect their lesser
dependence on permit imports: EEC, –6.7%; USA, –9.8%; OOE, –12.6%; and EET, –13.0%.
Finally, as shown in Fig. 7, neither the Kyoto commitments nor the scope of trading do much to
change the ratio of emissions per capita between the industrialized and developing economies of the
world.
Table 2. Per Capita Emissions in the Reference Case and in the Three Basic Trading Cases
USA JPN EEC OOE EET
OECD
+ EET FSU
Non-
An. B World
Population in 2010 (million) 277.2 125.0 341.9 135.8 128.5 1008.3 324.5 5585.7 6918.5
Reference (tonC/cap) 6.63 3.39 3.11 3.48 3.07 4.16 2.35 0.74 1.32
No Trading (tonC/cap) 4.57 2.24 2.21 2.21 2.15 2.86 2.35 0.74 1.13
Annex B Trading (tonC/cap) 4.95 3.00 2.52 2.53 2.11 3.20 1.63 0.74 1.14
World Trading (tonC/cap) 5.98 3.30 2.90 3.04 2.67 2.78 2.04 0.61 1.14
Details for Non-Annex B Regions EEX CHN IND DAE BRA ROW
Population in 2010 (million) 1103.8 1376.9 1132.4 236.8 199.9 1535.8
Reference (tonC/cap) 0.84 1.30 0.43 1.30 0.49 0.35
World Trading (tonC/cap) 0.79 0.98 0.34 1.13 0.47 0.29
0
1
2
3
4
5
6
7
USA OECD+EET FSU Non Annex B World
Metric Ton Carbon
Reference
No Trading
Annex B Trading
Full Global Trading
Figure 7. Per Capita Carbon Emissions.
10
3. IMPORT LIMITATIONS
The three illustrative cases presented above are based on several assumptions:
· Potential participants in emissions trading are not impeded by restrictions on trading,
· All parties participate to the extent warranted by the economics,
· Trading is conducted efficiently with low or non-existent transactions costs, and
· There is no monopolistic behavior.
Such assumptions simplify exposition and the analysis of emissions trading, but they are not
necessarily realistic. One of the possible departures from this theoretical ideal is a limit on the
extent to which an Annex B party can rely on emission permits to reduce what otherwise would be
its domestic abatement requirement. The “supplementarity” provisions of the Kyoto Protocol
suggest such a limit, although no specific number has been agreed upon. More recently, the EU
environmental ministers have called for a “concrete ceiling” on permit imports.
To illustrate the implications of such a restriction, we consider limits of 75%, 50% and 25% on
any Annex B party’s ability to meet its emission reduction requirement through imported permits.6
From the full global trading case without restrictions, we know that Japan would optimally realize
92% of its Kyoto commitment through imports, so that with a 75% limit, it would have to abate
more domestically. The EEC would also be affected, but to a very slight extent since it would
otherwise import 76% of its emission reduction requirement; but none of the other importing
regions would be affected. With a 50% limit, all regions would be limited and forced to abate more
domestically at higher cost; and at a 25% limit, the reliance on higher cost domestic abatement
would be even greater.
Figure 8 shows how the demand curve is shifted inward by such limitations, and Table 3
summarizes the effects on prices (in 1985 US$), quantities and costs. The “No Limit” case is the
same as full global trading, and it is provided for comparison.
The effect of import limits upon the exporting regions is predictable. With less demand, the market
price falls, fewer “rights to emit” are produced and exported, and there is a drop in the gains to
exporters. The effects on importers are twofold. Importers that are not affected by the limitation
import more, and at a cheaper price; thus they realize more savings. They are better off because the
limitation removes some of the demand by higher cost abaters from the market. Importers who are
affected by the limitation also benefit from this lower market price on their imports, but they also
incur higher domestic abatement cost.7 For instance, with the 75% limit, the net balance between
these two opposing effects is positive for the EEC (+1.14% gains) but negative for Japan (-1.94%).
6 The Kyoto Protocol specifies only that “trading shall be supplemental to domestic actions.” We define this
potential limitation as a percentage relative to the emission reduction implied by the Kyoto commitment without
trading, given EPPA’s prediction of reference emissions.
7 Consumers will not receive the benefit of cheaper imports since the discrepancy between the internal marginal
abatement cost and the world market price creates a rent for the allowed imports that will be collected somehow,
perhaps through a government auction of the rights to import permits. Since this sum is a internal transfer, we do
not count it as a resource cost. We are indebted to Ken Chomitz of the World Bank for pointing out this feature of
our analysis.
11
$0
$20
$40
$60
$80
$100
$120
$140
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
Annex I
Trading
Supply World
Trading
Demand
Kyoto Cap
Figure 8. World Supply and Demand in 2010 under Kyoto Constraints. Limitations on Demand:
75%, 50%, and 25%. (Tables D, E, F)
Table 3. Effects of Import Limits on Global Emissions Trading
No Limit 75% Limit 50% Limit 25% Limit
Market Price (1985 US$/tonC) $24 $23 $13 $3
Quantity Traded (Mton C) 935 913 656 328
FSU (Mton) 211 209 183 148
Non-Annex B (Mton) 723 704 473 180
World Cost (billion 1985 US$) $11.2 $11.9 $21.7 $55.3
OECD+EET Cost $25.6 $25.4 $27.1 $56.1
FSU Gain $4.2 $4.0 $2.0 $0.5
Non-Annex B Gain $10.2 $9.5 $3.4 $0.3
The overall effect of the 75% limit is relatively slight: the world cost increases slightly (6.5%),
the quantity traded is 2% less, the price falls by 4.1%, and the cost to the Kyoto-constrained
regions is reduced slightly. With a 50% or 25% limit on imported permits, all the importing
regions are restricted, and the price of imports is much lower, $13 and $3, respectively. Among
the importing regions, the effects of this tighter limit depend upon the balance between higher
domestic abatement costs and cheaper import costs. At 50%, this balance is now negative for both
EEC and Japan, but the benefit of the much cheaper imports continues to outweigh the higher
domestic abatement costs for the other three importing regions. With a 25% limit, all the importing
regions are worse off than they would be without any limit on imports, and the percentage
increases in cost are greatest for the higher cost producers of abatement among the importing
regions (JPN, +425%; EEC, +123%; OOE, +73%; USA, +58%; EET, +5%).
From the standpoint of the suppliers, the effect of a limitation on imports is to skew the
distribution of gains from trading even more heavily in favor of the importing regions. It can be
seen in Table 2 that, as the limit becomes more stringent, greater domestic abatement by the
importing regions causes world costs to rise, but at least up to the 50% limit, the total cost for the
importing regions remains relatively constant, at $25–27 billion. In contrast, for the exporting
regions, the gains from emissions trading diminish markedly. The global efficiency losses due to
12
the import limit are effectively shifted to the exporting regions through the lower price of imported
permits. Only when the limit becomes very tight and the price of permits is very low, for instance
within 25% limit, do the increases in domestic abatement costs outweigh the benefits of cheaper
imports, and the importing regions start to absorb the efficiency losses.
The effect of a quantitative limit on imports can be summarized quickly. To the extent that it is
binding, it redistributes the gains from trading among the importing regions from those facing the
highest abatement costs to those facing the lowest costs. Furthermore, and at least initially, it shifts
the increase in global cost caused by a binding import limit onto the suppliers.
4. CDM “SURCHARGES” AND CARTELIZATION OF SUPPLY
Departures from the theoretical ideal can also arise on the supply side. The Kyoto Protocol
provides for a Clean Development Mechanism (CDM) by which non-Annex B emissions
reductions would be certified and made available as emission permits for Annex B countries. The
exact role of the CDM has yet to be defined, but the Protocol does provide that the CDM would
apply a surcharge to cover its administrative expense and to collect funds to assist countries “to
meet the cost of adaptation” (Article 12.8). Also, because of the inelasticity of demand at low
market prices, there is a possibility that suppliers could increase their gains significantly by
colluding to limit supply, instead of competing among themselves.
4.1 CDM Surcharges
CDM surcharges would create a wedge between the price paid by consumers and that received
by producers, as illustrated in Figure 9 for surcharges of 25%, 50% and 100% of the marginal
cost of supply. Table 4 provides details concerning prices, quantities and gains. Surcharges of
50% or 100% are beyond any level being discussed currently, but they do illustrate the effects of
inelastic demand. Since FSU exports would not be surcharged, we treat the FSU as a competitive
supplier in all these cases.
The most notable feature of Table 4 is that CDM net profit, defined as revenue minus abatement
cost, increases as the surcharge is raised even though importers reduce demand in response to the
higher prices. This phenomenon reflects the price inelasticity of demand over this portion of the
aggregate demand curve. As would be true of any tax, there is a welfare loss, equal to the increase
in world cost as a result of the more expensive abatement undertaken by importers.
The second notable feature of Table 4 is that producer profit decreases on the assumption that
surcharge revenue goes to the CDM. Of course, the distribution of the proceeds raised by the
surcharge would be a matter for the producers to decide. With inelastic demand, it would be
theoretically possible to devise distributions that would keep producers whole and still make funds
available for other purposes such as adaptation. Nevertheless, any redistribution of funds for such
purposes will reduce what the non-Annex B producers might otherwise receive.
13
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
0 200 400 600 800 1,000 1,200
Quantity (Mton)
Allowance price
Supply from
Non-Annex B
through CDM
Demand to
Non-Annex B
Kyoto Cap
25%
50%
100%
Figure 9. CDM Surcharges: 25%, 50% and 100%. (Tables G, H, I)
Table 4. Prices, Flows and Gains with a CDM Surcharge
Level of CDM Surcharge None 25% 50% 100%
Market Price (1985 US$) $23.8 $27.4 $30.6 $35.9
Producers Marginal Cost (‘85$) $23.8 $22.0 $20.4 $17.9
CDM Net profit (billion $) $10.2 $12.6 $14.4 $17.0
Profit to producers $10.2 $8.9 $7.9 $6.3
Surcharge Proceeds $0 $3.7 $6.6 $10.7
CDM Exports (MtonC) 723 687 654 602
FSU Exports (MtonC) 211 219 225 235
FSU Gains (billion $) $4.2 $5.0 $5.7 $6.9
OECD+EET Cost (billion $) $25.6 $28.9 $31.7 $36.3
World Cost (billion $) $11.2 $15.0 $18.2 $23.0
The implicit conflict between producer interests and re-distributive goals has larger implications
for the evolution of the global climate regime. It will be readily evident to all non-Annex B
producers that the greatest beneficiary from CDM surcharges is the FSU. As a competitive
supplier, the FSU benefits directly from the increase of the market price and the increase of its
exports. It is able to benefit doubly because, having accepted an Annex B limit on emissions, its
exports are not surcharged. The example will be compelling for many non-Annex B producers,
who will come to see Annex B accession as a way to by-pass the CDM. Proponents of the CDM
will not be pleased, but such action is essential both to the creation of a more efficient global
trading system and to achieving the stabilization of atmospheric concentrations of GHGs.8
8 See Yang and Jacoby (1997) and Jacoby, Prinn and Schmalensee (1998).
14
Accession logically implies a transitional role for the CDM. So long as the CDM provides an
essential service—recordation, certification and verification—for converting non-Annex B
emission reductions into tradable emission permits, a reasonable fee can be charged. But that
service, and the attendant role for the CDM, would no longer be needed as non-Annex B parties
accept limits and arrange for their own certification and verification as part of the global emissions
trading regime.
4.2 Cartelization of Supply
The ability to raise surcharges without diminishing net profit to non-Annex B producers may
inspire thoughts of a cartel, not so much because of the CDM, which might serve as a coordinating
mechanism, but because of the inelasticity of demand that characterizes the global emissions
market.9 This potential is explored in Table 5, which compares the effects, under full global
trading, for a fully competitive market and two alternative assumptions about non-competitive
behavior:
1) A CDM cartel in which the FSU is a competitive supplier, and
2) A full supplier monopoly in which the FSU and the non-Annex B countries cooperate
through the CDM or an alternative mechanism.
In calculating the gains for the FSU and the non-Annex B regions, we assume that the monopoly
rent, the difference between market price and marginal cost, is shared in proportion to the quantity
of abatement provided at marginal cost. In doing so, we also assume a highly efficient cartel in
which only the lowest cost sources of permits are produced (including the FSU’s hot air).
Successful monopolization has the expected effects: the market price is higher, as is world
resource cost, and the gains from trade are shifted substantially to the suppliers. In the case of the
CDM cartel for example, the importing regions lose $32 billion: the $9 billion increase in global
costs plus a $23 billion transfer of income to the suppliers. With the full supply monopoly, the
importing regions lose another $25 billion, $12 billion in increased resource cost and another
$13 billion transfer to the suppliers. Even though this is a dramatic change in the distribution of the
gains from permit trade, the Kyoto-constrained regions are still better off (by $7 billion) than if
there were no supply at all from the non-Annex B regions. The FSU is, however, always worse
off, even when the suppliers successfully create an efficient monopoly.
Table 5. Effect of Non-Competitive Behavior on Gains from Trade, Costs and Prices (Tables J to L)
Competitive case Non-Annex B cartel Non-Annex B + FSU monopoly
Market Price ($/metric ton C) $23.8 $62.7 $108.2
World Cost (billion 1985US$) $11.2 $20.0 $32.2
Non-Annex B Gains (billion $) $10.2 $22.4 $30.1
FSU Gains (billion $) $4.2 $13.8 $17.4
OECD+EET Gains (billion $) $94.2 $63.6 $39.2
9 In contrast, there is little potential for non-competitive behavior in the Annex B case because of the higher price
and more price elastic demand, as discussed in Ellerman and Decaux (1998).
15
Table 6. Effect of Monopoly on Gains for Suppliers when Limit on Permit Imports (Tables J to L)
Limit on
imports
Competitive
case
Non-Annex B +
FSU monopoly
Market Price ($/metric ton C) No limit $23.8 $108.2
50% limit $12.5 $103.4
World Cost (billion 1985US$) No limit $11.2 $32.2
50% limit $21.7 $37.6
Non-Annex B Gains (billion $) No limit $10.2 $30.1
50% limit $3.4 $26.2
FSU Gains (billion $) No limit $4.2 $17.4
50% limit $2.0 $16.3
OECD + EET Savings (billion $) No limit $94.2 $39.2
50% limit $92.6 $39.8
The incentive to collude would be even greater if limits were placed simultaneously on import
demands, since the effect of such limits is to make demand more inelastic. Table 6 makes the
point. It shows the effect of the full monopoly on price, world cost and gains when there is no
limit on permit imports and when a 50% limit is set.
The effect of successful monopoly is much the same whether or not there are import limits. The
market price rises to about the same level, $103 vs. $108, world cost increases, and the exporting
regions gain significantly at the expense of the importing regions. The effect of a 50% import limit
is also much the same whether a competitive market or a monopoly is assumed. The market price is
reduced, world cost increases, and producer gains are diminished, but by less when there is a
monopoly.
5. INEFFICIENT SUPPLY
Full global trading is an appealing prospect, to importers for the great reductions in cost and to
exporters for the possibilities of non-competitive pricing, but both importers and exporters should
remember that the potential trading gains shown by CGE models assume complete economic
rationality and negligible transactions cost.10 The more likely contour of global emissions trading is
that this potential will not spring forth full blown once trading is allowed, but that it will develop
only slowly as experience is gained. Figure 10 depicts several possibilities for less than fully
efficient supply in which it is assumed that 5%, 10%, 15%, 25%, and 50% of the supplies from
the FSU and non-Annex B regions are available at every price.11 The lowest line, corresponding to
100%, is fully efficient global trading.
10 EPPA 2.6 is not alone in making such forecasts. The recent analysis provided by the U.S. Council of Economic
Advisors to support Chairman Janet Yellen’s earlier testimony, USG/EOB (1998), obtains a similarly low permit
price for a comparable market.
11 Expansion in the scope of trading would occur in periods after 2010, when permit demands and supplies might
vary depending on growth and subsequent climate agreements. This illustration, using a static 2010 picture, shows
the nature and approximate magnitude of the changes over time.
16
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance Price
15%
10%
5%
Supply
Supply = 50%
of Total
Demand
Kyoto Cap
Supply = 25%
of Total
Figure 10. World Permit Supply and Demand in 2010 under Kyoto Constraints. Limitation on
Supply: Suppy = 50%, 25%, 15%, 10%, and 5% of Total. (Tables M to Y)
Inefficient supply could result from several causes. The most serious and most likely is the
influence of transaction cost, particularly that involved in meeting the “additionality” criterion. Past
experience with credit-based emissions trading systems applied to other environmental problems
and with Joint Implementation pilot projects has shown these costs to be large and the quantities
traded to be small.12 Alternatively, a general failure to take full advantage of economic
opportunities presented by emissions trading would also limit the amount of credits available from
the non-Annex B regions and the FSU. Finally, some non-Annex B countries have expressed
considerable antipathy to emissions trading as a concept; and they may decide not to participate in
an emissions trading regime, whether through the CDM or otherwise, for political reasons. It is not
possible to assess beforehand to what extent these causes might operate in a global market, but
they will certainly be present.
If the supplies from the global market are very small initially, say 5% of the full global
potential, then the market price for permits would be relatively high ($181) and the quantities
traded small (170 Mton). As experience is gained and supplies become more ample, the quantities
traded would increase and prices fall. The gains from emissions trading increase with improved
efficiency of supply and they become quite large well before attaining 100% efficiency. As shown
in Figure 11, total gains increase steadily, but those for exporters increase only up to a point a little
above15%. Thereafter, the relatively inelastic demand causes the gains to exporters to decline,
while those to the importers increase dramatically.
12 See UNCTAD (1998) for a discussion of the relative efficiency of allowance and credit based trading systems.
These costs will be greatly reduced to the extent that non-Annex B regions accept emission caps that remove the
concern about additionality and the necessity to establish a counterfactual baseline. Curiously, the Kyoto Protocol
also asserts “additionality” as a criterion for joint implementation projects within Annex B countries (cf. Art. 6).
17
0
20
40
60
80
100
120
5% 10% 15% 25% 50% 100%
Percent of Full Potential
Billion 85$US
Importers
Exporters
Figure 11. Gains from More Efficient Global Trading. (Tables M to Y)
When supply is very inefficient, the market distortions considered earlier have little effect. For
example, as severe a limitation on demand as a 25% ceiling would affect only Japan if supplies
from the FSU and non-Annex B regions were only 5% of the full potential. And at the prices
reflecting very inefficient supply, there would be no gain to monopoly. Nevertheless, as supply
becomes more efficient and prices decrease, a limitation on imports would become more binding;
and as the market clearing price moved into the inelastic range (below about $110), noncompetitive
pricing could become more of a concern.
With inefficient supply, the effect of CDM surcharges will also depend on the elasticity of
demand. In the inelastic range (low price, large quantity), corresponding to greater supply from the
non-Annex B regions, the surcharge can result in greater gains for exporters, so that it is at least
possible to keep producers whole (compared to no surcharge) and generate funds for other
purposes. However, in the inelastic range (high price, small quantity), any surcharge will reduce
the total gain to be shared between producers and other claimants.
As would be expected, inefficient supply implies a higher market price, greater world cost and
fewer gains from trade, but the gains will still be substantial and decidedly worth pursuing. The
effects of distortions, such as import limitations and non-competitive pricing, are the same as with
fully efficient supply, but the magnitude of the effect is less because there is less to lose. Perhaps
the most notable feature of inefficient supply is that the gains to early entrants in the global
emissions market will be very large. Thereafter, as is true for any innovator, the large initial reward
will dissipate as imitators follow.
6. INTERNATIONAL TRADE IN ENERGY AND NON-ENERGY GOODS
MACs provide a simple and direct way to study emissions trading, but they do not indicate the
effect of abatement actions on the prices and quantities of goods in international trade. The effects
of emissions reductions may not be restricted to the countries undertaking the abatement actions.
Through trade they may be transmitted to countries that made no commitment. In this section, we
depart from the use of MACs and examine these other effects using the EPPA results directly.
18
The central feature driving these trade-in-goods effects is the shadow price for carbon that is
faced by the Kyoto-constrained regions, and the effect of that shadow price on the world price for
oil and natural gas. Table 7 provides a quick summary of those prices for the 2010 reference case
and our three basic emissions trading scenarios. Carbon prices are shown in 1985 dollars; oil and
gas prices are shown as an index with the 2010 price in the reference case set to 1.0.
Table 7. Carbon And Energy Prices In 2010 For Kyoto-Constrained Regions
Reference No Trading Annex B Global
Carbon Price $0 $116–584 $127 $24
Oil Price 1.0 0.90 0.95 0.99
Natural Gas Price 1.0 0.83 0.86 0.96
Oil and natural gas are treated as Hecksher-Ohlin goods in EPPA, which means that there is
complete freedom of trade among regions and a single world price. As a result, restrictions on
carbon emissions in Annex B countries lead to lower oil and natural gas prices for producers and
consumers throughout the world. In contrast, coal is an Armington good, which means that there
is no single world price but a series of regional prices that can be affected by changes in trade
flows. Consequently, actions by the Annex B regions will affect coal prices in these regions, but
generally not elsewhere, or only through the quantities traded (which are not great.)
As the scope of emissions trading expands and the price of carbon declines, the effect of Kyoto
commitments on energy prices diminishes. This effect occurs because one of the cheapest forms of
carbon abatement is the reduction of and substitution away from the use of coal. Emissions trading
makes it possible to substitute reduced coal use in non-Annex B regions for more expensive
abatement that reduces oil and natural gas use in Annex B regions.
The effects on trade patterns of the Kyoto commitments and emissions trading are most
usefully observed by comparing the no trading case with full global trading. The former can be
viewed as a relatively inefficient way of achieving the goals set at Kyoto, while the latter represents
the most efficient way. Emissions trade limited to Annex B is an intermediate case, which we omit
because its effects lie between what occurs with no emission trading and with full global trading. 13
6.1 Trade in Goods with No Emissions Trading
The starting point for the no emissions trading case is the effect of the carbon price on domestic
demand in the Kyoto-constrained regions. Table 8 provides the percentage change from the
reference prediction for domestic use of sectoral output (production less exports plus imports) by
each Kyoto-constrained region. The sectoral breakdown in EPPA includes five energy sectors (oil,
gas, coal, electricity and refined oil) and three non-energy sectors (agriculture, energy intensive
industries, and other industries).
13 The FSU is the one exception. With Annex B trading, its demand for energy declines in the same manner as the
Kyoto-constrained Annex B regions, as does its production and export of energy-intensive goods.
19
Table 8. Percent Change in Domestic Use by Sector and Region Due to
Kyoto Commitment Without Emissions Trading
USA JPN EEC OOE EET
Oil –3.5% –19.6% –4.0% –7.6% –3.4%
Gas –11.1% –24.8% –10.3% –14.1% –12.1%
Coal –54.5% –48.8% –52.1% –63.2% –49.4%
Electricity –11.1% –11.3% –12.2% –13.1% –19.7%
Refined Oil –6.5% –20.3% –7.7% –10.6% –7.7%
Agriculture –0.7% –2.2% –0.2% –0.9% –0.4%
Energy Intensive –0.5% –5.1% –2.6% –1.7% –2.2%
Other Industries +0.1% –1.1% –0.2% –0.4% –0.6%
With one insignificant exception, all the signs are negative, and they are greatest in magnitude
for the energy sectors. Coal is hit hardest with domestic use declining by about half in all regions.
However, coal, like electricity and refined oil, is mostly a domestic good so that the international
trade effect of this reduction in demand is not particularly great. Oil and gas are more heavily traded
internationally, and the effect of the reduction in Annex B demand is a world-wide fall in the price
of oil and gas: by 10% and 17%, respectively, as was shown above in Table 6.14 This reduction
in price reduces the income of oil and gas producers throughout the world; and the effect will be
particularly large on the two oil and gas exporting regions, the EEX and the FSU. Interestingly,
the quantities of oil and gas traded internationally do not change much, but there is a shift in the
destination of energy exports away from the Kyoto-constrained regions towards the nonconstrained
regions, as illustrated next, through trade in energy-intensive goods.
The domestic use of energy-intensive goods declines in all Kyoto-constrained regions;
however, the most significant effects show up in the trade balances and domestic output for these
goods, as shown in Table 9. The patterns are very clear. The Kyoto-constrained regions reduce
production and net exports of energy-intensive goods, while the non-constrained regions increase
output and net exports of them. The Kyoto-constrained regions increase imports of these goods,
and of the non-taxed carbon that is embodied in them.
Table 9. Changes in Export, Import and Output of Energy Intensive Goods: No Emissions Trading
Absolute
Change in: USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
Net trade –2.57 –30.96 –26.20 –6.29 –1.61 +7.93 +22.8 +6.78 +1.13 +6.07 +1.86 +21.1
Output –6.90 –61.68 –42.25 –9.31 –4.99 +9.81 +21.1 +15.3 +2.74 +15.8 +3.46 +22.9
14 The greater effect upon natural gas results from the greater responsiveness to price changes in the industrial and
residential sectors, where natural gas is mostly used, than in the transportation sector, where petroleum products
dominate. Both oil and natural gas gain share in electricity generation at the expense of coal, but electricity demand
also shrinks. In the end, the balance between the losses in non-electricity sectors and the gains in electricity
generation are less favorable for natural gas than for oil.
20
6.2 Comparing the No-Trading Case with Full Global Trading
Meeting the Kyoto commitments with full global trading has much less effect on Annex B
demand for oil and gas and on the trade in energy-intensive goods than was the case with no
emissions trading, as shown in Table 10 and Table 11.
The effects of the Kyoto Protocol remain negative, but the magnitudes are much attenuated.
Coal use is reduced by at most a quarter; and the effect on other goods is generally less than 1%.
The world prices for oil and natural gas are reduced by only 1.3% and 3.5%, respectively, instead
of 10% and 17% in the no trading case.
The changes in trade and output of energy-intensive goods are all relatively small; and there is
no consistent pattern as in Table 9, because the price of carbon is the same in all countries. Output
and the net trade position is most adversely affected in China, India and FSU because their
production of energy intensive goods is more dependent on coal, which is the fuel most strongly
affected by any positive price on carbon emissions.
Table 10. Percent Change In Domestic Use By Sector And Region Due
to Kyoto Commitment With Full Global Trading
USA JPN EEC OOE EET
Oil –0.2% –0.2% –0.2% –0.3% –0.5%
Gas –0.5% –0.5% –0.7% –0.04% –0.9%
Coal –21.5% –5.0% –13.2% –25.0% –15.4%
Electricity –2.5% –0.3% –1.6% –2.3% –5.0%
Refined Oil –1.0% –0.8% –0.6% –1.2% –1.5%
Agriculture –0.1% –0.1% –0.03% –0.1% +0.2%
Energy Intensive –0.1% –0.1% –0.1% –0.1% +0.02%
Other Industries –0.1% –0.1% –0.1% –0.1% –0.1%
Table 11. Changes In Export, Import And Output Of Energy Intensive Goods: Full Global Trading
Absolute
Change in: USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
Net trade +0.37 +0.30 –0.09 +0.16 +0.19 –0.71 +1.61 –2.60 –0.94 +0.53 –0.02 +1.22
Output –0.59 –0.18 –0.93 –0.02 +0.21 –1.81 +0.45 –8.90 –2.25 +0.10 –0.01 +1.24
6.3 Summary
The effects of the Kyoto Protocol and of emissions trading on non-Annex B regions consist of
three analytically separate elements, which can be summarized by the simple matrix in Table 12.
Table 12. Effect of Kyoto and Emissions Trading
KYOTO EFFECT No Emissions Trading Global Emissions Trading
Permit Revenues 0 +
Oil & Gas Export Revenue – – –
Energy Intensive Goods Trade + 0
21
Whether there is emissions trading or not, the effect of the Kyoto commitments on non-Annex B
countries is mixed. Without emissions trading, there will be no permit exports, but an increase in
the production and export of energy intensive goods can be expected, assuming no protective trade
measures are enacted by the Kyoto-constrained regions. With global emissions trading, there will
be permit export revenues, but no significant increase in production and exports of energy
intensive goods. The revenues of non-Annex B regions that export oil and gas will be adversely
affected in either case, but much less so with the lower carbon price associated with a broadened
market for emissions permits. In effect, oil and gas exporters benefit as emissions trading makes it
possible for Kyoto-constrained regions to substitute reduced coal use in non-Annex B regions for
reduced oil and natural gas use at home.
7. CONCLUDING OBSERVATIONS
The effect on developing countries of Annex B actions to comply with the Kyoto Protocol will
depend on the particular country and on the success of emissions trading. All developing economies
will have an interest in emissions trading as a source of new export earnings, but their interest will
extend beyond this new commercial possibility. In particular, oil and gas exporters will have a
strong interest in emissions trading as a means to reduce the cost for Annex B parties generally, and
specifically to allow Annex B parties to substitute reduced coal emissions abroad for reduced oil and
gas emissions at home. It is possible that some countries and sectors would be adversely affected by
emissions trading. For instance, the advantage enjoyed by producers of energy-intensive goods will
be greater with no emissions trading, assuming that importing embodied carbon is permitted by the
Annex B regions. The net balance will be different for various countries, but in general it seems
likely that developing countries will benefit from emissions trading.
The gains from emissions trading are potentially very large, fully sufficient to give potential
buyers and sellers an economic incentive to support such a system. Most studies of permit trade
suggest ample supplies would be offered by non-Annex B regions, at commensurately low prices,
yielding large cost reductions for the Kyoto-constrained regions and substantial benefits to non-
Annex B regions. The actual supply is likely to be somewhat less, at least initially, due to
transactions cost and less than complete participation in the market by non-Annex B regions.
Nevertheless, whatever the initial extent of the market and its subsequent development, both
importing and exporting parties will gain.
As in any market, the potential for welfare-damaging distortions is always present. Given the
undefined meaning of “supplemental” in the Kyoto Protocol, a particularly alarming distortion
from the developing country standpoint is a limitation on Annex B imports of emission permits.
Not only will such limits depress permit prices and the export earnings of non-Annex B parties,
but they will have perverse effects on importing countries. Annex B parties with relatively high
domestic abatement costs, and thus higher imports, would be penalized, while those with relatively
low domestic abatement costs, and fewer imports, would find the cost of meeting their Kyoto
commitments reduced.
22
The ability of the CDM to impose surcharges to help countries meet the costs of adaptation will
depend upon the elasticity of demand, which depends in turn on the supply available from non-
Annex B regions. The greater the supply and the lower the price, the greater the ability to impose
surcharges without fear of losing revenue. Still, there is an unavoidable conflict between the
interests of the producers of the permits and redistributive goals, since whatever is redistributed
could as well be kept by the producers.
The FSU and the non-Annex B countries appear as clear rivals to each other in the stylized
cases we have presented, but casting this rivalry in geopolitical terms obscures a more practical
aspect. Neither the Annex B nor the global market will spring into life full blown as soon as the
appropriate institutional arrangements are made; instead these markets will develop slowly over
time. The stylized Annex B market should be thought of as illustrating the potential gains for first
entrants of whatever provenance into a new and expanding market. Those gains will inevitably be
dissipated as others follow, so that the conflict, which appears here as one between the FSU and
non-Annex B regions, is really one between the early entrants and later followers.
The FSU does however have one large advantage. Assuming effective accounting and
enforcement, its acceptance of an Annex B emission limitation removes the high costs of
establishing additionality, which will be required of projects in non-Annex B countries. This
example will encourage the most enterprising non-Annex B countries to accede to Annex B to
capture more of the large gains of early emissions trading. In doing so, these parties will foster
more efficient emissions trading and promote the ultimate goals of the Kyoto Protocol, but they
will also necessarily reduce the ability of the CDM to act as a re-distributive mechanism.
8. ACKNOWLEGMENTS
Funding for this paper from the World Bank is gratefully acknowledged. We are also very much
indebted to Ian Sue Wing for modeling support and to the following individuals for comment on
earlier versions of the paper: at MIT, Richard Eckaus, David Reiner and Mustafa Babiker; and at
the World Bank, Zmarak Shalizi, Ken Chomitz and Maureen Cropper.
9. REFERENCES
Ellerman, A.D. and A. Decaux, 1998, Analysis of Post-Kyoto Emissions Trading Using Marginal
Abatement Curves, MIT Joint Program on the Science and Policy of Global Change Report
No. 40, October, Cambridge, MA.
Jacoby, H.D., R.G. Prinn and R. Schmalensee, 1998, Kyoto’s Unfinished Business, Foreign
Affairs, 77(4):54-66, July/August.
Prinn, R.G., et al., 1998, Integrated Global System Model: Feedbacks and Sensitivity Studies,
Climatic Change, forthcoming; MIT Joint Program on the Science and Policy of Global
Change Report No. 36, May, Cambridge, MA.
United Nations Conference on Trade and Development (UNCTAD), 1998, Greenhouse Gas
Emissions Trading: Defining the Principles, Modalities, Rules and Guidelines for Verification,
Reporting and Accountability, Geneva, Switzerland, draft of July.
23
United Nations Framework Convention on Climate Change, 1997, Kyoto Protocol.
United States Government, Executive Office of the President, 1998, The Kyoto Protocol and the
President’s Policies to Address Climate Change: Administration Economic Analysis, July.
Yang, Z., et al., 1996, The MIT Emissions Prediction and Policy Analysis (EPPA) Model, MIT
Joint Program on the Science and Policy of Global Change Report No. 6, Cambridge, MA.
Yang, Z. and H.D. Jacoby, 1997, Necessary Conditions for Stabilization Agreements, MIT Joint
Program on the Science and Policy of Global Change Report No. 26, Cambridge, MA.
25
APPENDIX A: MARGINAL ABATEMENT CURVES15
A.1 What are Marginal Abatement Curves and What Do They Represent?
A CGE model will produce a shadow price for any constraint on carbon emissions for a given
region R at time T. An example would be a 10% reduction below the reference case for USA in
2010. This price indicates the marginal cost of reducing the last ton of carbon required to meet the
constraint. As might be expected in a proper CGE model, the shadow prices corresponding to
constraints of increasing severity rise as an increasing
function of emissions reduction. A Marginal Abatement
Curve is described by generating the plots of the shadow
prices corresponding to constraints of increasing severity
at time T, then drawing a line joining the plots, as in
Figure A1. Each plot on the curve for region R at time T
represents the marginal cost (p) of abating an additional
unit of carbon emissions at quantity q. The integral
under the curve (hatched area) represents the total
abatement cost associated with each level of abatement,
that is, the resources re-allocated to abatement because of
the constraint.
Region R, Time T
Shadow price of carbon
q
MAC
p
CO2 abated
plot
= Total cost of abatement
under constraint: q abated
Figure 1. Marginal Abatement Curves
A.2 How Can MACs Be Used for Trade Studies?
If several regions commit to achieve emission
reductions at the same time and there is some
prediction of what emissions would be without the
commitment, the abatement required can be
represented as a point on each region’s marginal
abatement curve.17 Moreover, if the marginal costs
associated with those reductions are different across
regions, the aggregate cost of meeting the
commitments will be less to the extent that a region
with higher marginal costs can induce a region with
lower marginal costs to abate more on its behalf.
Figure A2 illustrates the gains from trading for two
regions, R1 and R2, subject to the constraints: CO2
abated = q1 for R1 and q2 for R2.
R1 Time T
I1 I2
R2
A
A'
B'
B
Q' Q1 Q2
Shadow price of carbon
q' q1 q2 q'
p'
0
p2
p1
CO2 abated
2
Q'2
1
1
Figure A2. Marginal Abatement Curves
Used for Trade Studies.
15 This appendix draws heavily on Ellerman and Decaux, 1998.
17 As is typically assumed in such analyses, and as is the case here, the environmental goal pursued—reducing
atmospheric concentration of a long-lived, well-mixed greenhouse gas like CO2 is not affected by the location of
the emission reduction.
26
By abating more, the lower cost region produces “rights to emit,” or emission permits, which it
can sell to the higher cost region which would thereby avoid a like amount of higher cost domestic
abatement. Thus, the difference in the marginal costs associated with each region’s commitment in
the absence of trade creates a potential gain to be shared in some manner between them. The
aggregate emission reduction will be achieved at least cost when the two regions trade until their
marginal abatement costs are equal at what will then be the market clearing price for the “right to
emit” carbon.
Table A1 displays the cost calculations in the no trading and trading cases. These cost
calculations can easily be generalized to N regions, and they constitute the basis for emissions
trading studies using MACs.
Table A1. Basics of Trade Studies
No Trade Trade between R1 and R2
Constraints R1: q1 abated
R2: q2 abated
R1 and R2: q1 + q2 abated
Marginal Cost / Market Price R1: p1
R2: p2
R1 and R2: p' such that p'1(q'1) = p'2(q'2) = p'
and q'1 + q'2 = q1 + q2
Abatement Cost R1: area AOQ1
R2: area BOQ2
R1: area (A'OQ'1)
R2: area (B'OQ'2)
Emission Permits Trading NA R1: buys right to emit q1 – q'1
R2: sells right to emit q'2 – q2 = q1 – q'1
Imports (+) / Exports (–) Flows NA R1: pays p' ´ (q1 – q'1) = area (A'I1Q1Q'1) to R2
R2: receives p' ´ (q'2 – q2) = area (B'I2Q2Q'2) from R1
Total Cost R1: area AOQ1
R2: area BOQ2
R1: area (A'OQ'1) + area (A'I1Q1Q'1) < area (AOQ1)
R2: area (B'OQ'2) – area (B'I2Q2Q'2) < area (BOQ2)
Savings from Trading NA R1: area (AI1A') (hatched)
R2: area (BI2B´) (hatched)
A.3 How are MACs Generated from CGE Models?
The CGE model we use to generate MACs is the MIT Emissions Prediction and Policy Assessment
(EEPA) model. It is a multi-sectoral, multi-regional global model of economic activity, energy use
and greenhouse gas (GHG) emissions that is part of MIT’s larger Integrated Global Systems
Model (IGSM).17 As such, EPPA is frequently used to predict emissions and to assess the costs
associated with constraints on carbon emissions. Although EPPA predicts emissions and assesses
costs through the year 2100, this study takes the year 2010 as representative of the first
commitment period, which includes the years 2008 through 2012. The model keeps track of five
vintages of capital. Version 2.6 of the model incorporates two backstop technologies; however,
because these energy sources will not play a substantial role in 2010, they are omitted from the
calculations presented here.
17 See Yang et al. (1996) for a description of EPPA, and Prinn et al. (1998) for a description of the IGSM.
27
To build the MACs, we run the EPPA model under different constraints corresponding to
different levels of carbon abatement, such as 10%, 20%, or 30% of reference emissions in the year
2010. For each set of constraints, the corresponding, regional shadow prices of carbon are an
output of the model (in 1985 US$).18 The shadow prices for each region can then be plotted as a
function of the level of abatement, and a line can be fitted to the plots to get the MAC for that
region and time.
As an example, Figure A3 shows the results obtained for the four OECD regions in 2010
when the policies applied are: proportional reductions by all OECD regions (1, 5, 10, 15, 20, 30
and 40% of reference 2010 emissions), and no reduction by other regions. Here, the shadow
prices have been plotted as a function of the percentage of carbon emission reduction (and not the
absolute quantities), in order to normalize for the size of the regions and to show the variation in
relative cost across regions. For any equal percentage reduction among the OECD regions, the
abatement of the corresponding quantities would cost most in Japan, then in EEC, and least in
USA and OOE.
Similar curves can be obtained for all regions. For example, the same proportional reductions
can be applied to all of EPPA’s twelve regions at the same time.19 Figure A4 displays the marginal
abatement curves thus obtained. It shows where it is the cheapest to abate carbon emissions (India
and China) and where it is the most expensive (Japan).
$0
$100
$200
$300
$400
$500
$600
$700
$800
0% 10% 20% 30% 40%
Carbon emissions reduction
Shadow price of carbon
($/ton)
JPN
OOE
EEC
USA
Figure A3. EPPA-Generated Marginal Abetaement Curves for 2010.
OECD Regions, Proportional Reductions, No Trading.
18 Although we often refer to CO2 emissions, all prices and quantities are in terms of carbon. Each ton of carbon
corresponds to 3.67 tons of carbon dioxide.
19 In doing so, we do not imply that non-Annex B countries assume quantitative national constraints, but only that
when faced with the corresponding price for carbon emission reductions, they choose to abate emissions in the
proportions indicated. The result is similar, but the motivation is different.
28
$0
$50
$100
$150
$200
$250
$300
$350
0% 10% 20% 30% 40%
Carbon emissions reduction
Shadow price of carbon ($/ton)
JPN BRA
EEC
EEX USA
OOE
EET FSU
CHN
IND
ROW
DAE
Figure A4. EPPA-Generated Martinal Abatement Curves for 2010.
All Regions, Proportional Reductions, No Trading.
Stating marginal cost in terms of the proportional reduction reveals the relative cost of carbon
abatement among the twelve EPPA regions, but it does not indicate the importance of various
regions in an emissions trading market. For example, as shown in Fig. A4, both China and India
are relatively low cost suppliers of abatement. However, as shown in Figure A5, China is a
significantly greater potential supplier of abatement than India by the simple fact that its reference
emissions are predicted to be 3.5 times as large (1,792 vs. 486 Mton).20 China is about 70% more
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
0 100 200 300 400 500 600 700
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
BRA
DAE
ROW
CHN
IND
EEX
USA
Figure A5. EPPA-Generated Marginal Abatement Curves for 2010.
Non-Annex B regions, Proportional Reductions, No Trading.
20 We include the USA in Figure A5 for comparison.
29
carbon intensive than India; and its economy is predicted to be about twice the size of India’s in
2010. As a result, for any given price, China supplies a much larger quantity of permits than India.
China is by far the largest potential source of emissions permits from the non-Annex B regions.For
instance, if the market price for emissions permits were $50, China would provide about 700 Mton
of emissions reduction, while the five other regions combined would provide only 400 Mton.
A.4 Assessing the “Robustness” of MACs with Regard to the Policy Applied
One question that arises immediately from our use of equal proportional reduction across regions to
generate the MACs is whether the location of these curves, or more generally, the cost associated
with any given level of carbon abatement, is affected by differing levels of abatement in other
regions. For instance, as can be seen in Table 1, the levels of implied abatement corresponding to
the Kyoto commitment are not strictly proportional, and with emissions trading, we would not
expect the percentage reductions among regions to remain the same. Will region R1’s MAC look
different depending on whether region R2 reduces by 10% or 40%? In a model with international
trade in all goods, such as EPPA, there is the possibility that a 40% reduction by region R2 would
alter trade flows such that abatement of, say, 100 Mton by R1 would cost more (or less) than if R2
reduced emissions by only 10%. This fundamental question is that of the robustness of the MACs.
And indeed, a drawing like Fig. 2 and the simple method we have deduced from it assume this
robustness (one curve for each region, whatever the reductions in other regions). The answer: they
are robust.
For example, Figure A6 shows simultaneously the two sets of MACs corresponding to
varying levels of OECD abatement assuming no emissions trading and fully efficient emissions
trading.21 The curves in both sets are similar (less than 10% variation in price for any given level of
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
0 100 200 300 400 500
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
JPN
OOE EEC
USA
No Trading
Trading
Figure A6. EPPA-Generated Marginal Abatement Curves for 2010.
OECD Proportional Reductions, No Trading and OECD Trading.
21 Note that, compared to Figures 3 and 4, the x-axis has been re-scaled to quantities.
30
abatement), thus showing that the MACs are robust with regard to this change of policy. We have
made similar comparisons for Annex B trading and global trading, and we have examined one
region’s MAC (the USA) when all other regions vary from reference to as much as a 60% reduction.
In all cases, we have found the same fundamental result: whatever the trading scheme, whatever the
extent of the market, the marginal abatement curves are almost identical. These model results indicate
that abatement cost in a region is largely independent of abatement efforts in other regions.
Our conclusion is that MACs, and more generally, the costs associated with a given level of
domestic abatement, are sufficiently insensitive to different levels of abatement among regions and
the scope of emissions trading to justify the analytic method applied here.
A.5 Analytical Approximations: A Simple Tool for Trade Studies
Robustness implies that at time T each region has a unique marginal abatement curve. This result
allows independent use of marginal abatement curves, once generated from CGE model, and
makes trade analysis straightforward. Such an analysis can be even further simplified if each curve
is described by a single mathematical expression because, once we have the equations of the
MACs, the cost calculations (i.e. integration under the curves) are simple and rapid.
Figure A7 shows, for the OECD regions, that we can fit very simple analytical curves to the
sets of plots resulting from the EPPA runs, and that those fits are very good (for each curve, R2
very close to 1.0). This result holds for all the other regions as well. The curves that best fit the
EPPA-generated plots are of the form: P = aQ2 + bQ, where Q is the amount of carbon abatement
in Mton and P is the marginal cost, or shadow price, of carbon in 1985 US$. By integration, the
total cost of abatement is C = 1/3 ´ aQ3 + 1/2 ´ bQ2. Table A2 displays the coefficients a and b for
each region in 2010, as well as the coefficient of determination R2.
y = 0.0024x2 + 0.1503x
y = 0.0155x2 + 1.816x y = 0.0085x2 – 0.0986x
y = 0.0005x2 + 0.0398x
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
0 100 200 300 400 500
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
JPN EEC
USA
OOE
R2 = 0.9938
R2 = 0.9951
R2 = 0.9981
R2 = 0.9923
Figure A7. Marginal Abatement Curves for 2010. OECD Regions, Polynomial Approximations.
31
Table A2. Coefficients of the Approximations of the MACs of the Form: P = aQ2 + bQ
Region a B R2 Region a b R2
USA 0.0005 0.0398 0.9923 EEX 0.0032 0.3029 0.9983
JPN 0.0155 1.816 0.9938 CHN 0.00007 0.0239 0.9992
EEC 0.0024 0.1503 0.9951 IND 0.0015 0.0787 0.9970
OOE 0.0085 – 0.0986 0.9981 DAE 0.0047 0.3774 0.9996
EET 0.0079 0.0486 0.9973 BRA 0.5612 8.4974 0.9997
FSU 0.0023 0.0042 0.9938 ROW 0.0021 0.0805 0.9967
In using these approximations, analysts should keep in mind that the price of this simplicity is
some loss of the details of the general equilibrium features of the underlying model. The
robustness of the curves assures us that the relation between price and quantity of abatement is
relatively fixed, but the curves do not capture all the effects of emissions trading. Since the EPPA
model remains our primary analysis tool, we have run the model in every policy case we studied in
order both to ensure that the approximations are not misleading and to capture any possible side
effects. The prices and quantities for abatement were all very close to the approximations, but there
is a side effect that the MACs do not show: “leakage.” When carbon emissions are constrained for
only a sub-set of regions, carbon emissions tend to “leak” to non-constrained regions.
Nevertheless, these effects are not essential to the analysis conducted here;22 and the analytical
approximations are a powerful computational shortcut to particular results. They also provide a
convenient way to represent graphically the results of the trading analysis.
A.6 Construction of Aggregate Supply and Demand Curves
Marginal abatement curves are the basis for determining
the demand and supply for emission permits in any given
market. Emission permits represent “rights to emit” and
these rights can be produced by some party abating more
than it is required to do, or undertaking some abatement
when not required to do so. The willingness of any party
to produce these permits is illustrated by Figure A8. The
vertical dotted line represents the amount of abatement
required for a region to meet its Kyoto commitment. In
the absence of any emissions trading it would abate the
amount indicated by the intersection of this line with the
MAC, and the corresponding price would be its autarkic
IMPORT
EXPORT
p
Kyoto q
Autarkic
marginal
price Lower
market
price
Higher
market
price
Figure A8. Willingness to Import /
Export with Regard to Market Price
of Permits.
marginal cost. If emissions trading were a possibility, the region would purchase or sell permits
according to the relation of the market price to its autarkic marginal cost.
22 A more extensive discussion of leakage, and its relation to hot air and emissions trading, is contained in Ellerman
and Decaux (1998).
32
• If the market price is lower than its autarkic marginal abatement cost, this region would be
willing to buy emission permits corresponding to the quantity difference between the autarkic
emission reduction and the domestic abatement it would undertake at the market price.
• Conversely, if the market price is higher than its autarkic marginal abatement cost, it would be
willing to undertake more abatement and supply the market with the “right to emit” the
corresponding quantity.
• Unconstrained regions, such as the non-Annex B regions or the FSU, are a special case. Their
autarkic marginal cost is zero, and they would be only suppliers to the market at any positive
price.
For whatever market one is considering, we simply add up the quantities (x-axis) potentially
supplied and those potentially demanded at each price (y-axis) across the constituent regions. As
we vary the price, we describe the demand and the supply curves for this market, and their
intersection indicates the market clearing price on the y-axis and the total quantity traded in that
market on the x-axis.
Figure A9 shows the aggregate demand and supply curves obtained in the Annex B and world
trading cases. The aggregate demand curve is the same in both the Annex B and the global market
because both include all Kyoto-constrained, i.e. potentially importing, regions. This single demand
curve intersects the horizontal axis at the quantity equal to the sum of the emission reductions
required to meet the Kyoto commitments, which is 1.31 Gton. This is the “Kyoto cap” represented
by a vertical dotted line on the figure; it is also the quantity of emission permits that would be
demanded if the price were $0/ton. At this price, the aggregate supply is the quantity of permits
available at no cost. This is the FSU’s 111 Mton of hot air.
As the price increases, the demand for permits diminishes, as more and more domestic
abatement is undertaken, and the supply of permits increases as more abatement is justified in the
unconstrained, exporting regions. As long as the market price is less than the lowest autarkic
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
World Trading
Demand
Supply
Annex B Trading
Kyoto Cap
Figure A9. Aggregated Supply and Demand Curves in 2010 under
Kytoo Constraints. Annex B Trading / World Trading.
33
marginal cost for the Kyoto-constrained regions, these regions are always on the demand side; and
the unconstrained regions are on the supply side. When the price reaches $116, the marginal cost
for EET, this region switches from the demand side to the supply side, resulting in a “kink” on the
demand and supply curves (which happens to be almost indiscernible because of the small
economic size of this region). Such a kink can readily be seen on both supply and demand curves
when the price reaches $186, the autarkic marginal cost for USA. There would be similar kinks at
$233 when OOE becomes a supplier and at $273 when the EEC does. At $584, the autarkic
marginal cost for Japan meeting the commitment, the demand for permits would be zero.
34
APPENDIX B: DATA TABLES
The following tables show the detailed results for cases studied in the text.
All the prices in the following tables are in 1985$. NAB = Non-Annex B regions
Repeat of Tables Shown in the Text
Table 1: Reference Emissions and Kyoto Commitments
Table 2: MACs Approximations Coefficients 3
Basic Cases – Reference Scenario
Table A: Kyoto No Trading
Table B: Annex B Trading
Table C: World Trading
Basic Cases – Low Growth Scenario
Table A': Kyoto No Trading
Table B': Annex B Trading
Table C': World Trading
Basic Cases – High Growth Scenario
Table A": Kyoto No Trading
Table B": Annex B Trading
Table C": World Trading
Import Limitations
Table D: Imports Limited to 75% of Total Reduction
Table E: Imports Limited to 50% of Total Reduction
Table F: Imports Limited to 25% of Total Reduction
CDM Surcharges
Table G: 25% Surcharge
Table H: 50% Surcharge
Table I: 100% Surcharge
Non-Competitive Behavior
Table J: World Trading, CDM Monopoly
Table K: World Trading, CDM + FSU Monopoly
Table L: World Trading, CDM + FSU Monopoly, with Imports Limited to 50% of Total Reduction
Inefficient Supply: Limited to 50% of Full Potential Supply
Table M: World Trading, Competitive Case
Table N: World Trading, CDM Monopoly
Table O: World Trading, CDM + FSU Monopoly
Table P: World Trading, Competitive Case, with Imports Limited to 50% of Total Reduction
Table Q: World Trading, CDM Monopoly, with Imports Limited to 50% of Total Reduction
Table R: World Trading, CDM + FSU Monopoly, with Imports Limited to 50% of Total Reduction
Table S: World Trading, Competitive Case, with Imports Limited to 25% of Total Reduction
Table T: World Trading, CDM Monopoly, with Imports Limited to 25% of Total Reduction
Table U: World Trading, CDM + FSU Monopoly, with Imports Limited to 25% of Total Reduction
Other Inefficient Suppy Cases: Limited to 25%, 15%, 10%, 5% of Full Potential Supply
Table V: World Trading, Competitive Case, Supply Limited to 25% of Full Potential
Table W: World Trading, Competitive Case, Supply Limited to 15% of Full Potential
Table X: World Trading, Competitive Case, Supply Limited to 10% of Full Potential
Table Y: World Trading, Competitive Case, Supply Limited to 5% of Full Potential
35
TABLE 1 - bis: Reference emissions and Kyoto commitments
Reference emissions USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Ref 1990 (Mton) 1362 298 822 318 266 3066 891 2022 5979 508 833 183 115 63 320
Ref 2010 (Mton) 1838 424 1064 472 395 4193 763 4142 9098 927 1792 486 308 97 532
low scenario 1748 412 1022 455 375 4012 737 3946 8695 903 1687 457 293 96 510
high scenario 1923 435 1102 488 416 4364 783 4327 9475 950 1891 514 323 98 551
Kyoto 0.93 0.94 0.92 0.95 1.04 \ 0.98 \ \ \ \ \ \ \ \
Emissions in 2010 (Mton) 1267 280 757 301 277 2881 873 4142 7896 927 1792 486 308 97 532
low scenario 1267 280 757 301 277 2881 873 3946 7700 903 1687 457 293 96 510
high scenario 1267 280 757 301 277 2881 873 4327 8081 950 1891 514 323 98 551
Reductions / ref 2010 (Mton) 572 144 307 171 118 1312 -111 0 1202 0 0 0 0 0 0
low scenario 481 132 266 154 98 1132 -136 0 995 0 0 0 0 0 0
high scenario 657 155 346 187 139 1484 -90 0 1393 0 0 0 0 0 0
TABLE 2 - bis: MACs approximations coefficients (P = aR2+ bR)
USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
a 5.00E-4 1.55E-2 2.40E-3 8.50E-3 7.90E-3 2.30E-3 3.20E-3 7.00E-5 1.50E-3 4.70E-3 5.61E-1 2.10E-3
b 0.04 1.816 0.15 -0.099 0.049 0.004 0.303 0.024 0.079 0.377 8.497 0.081
BASIC CASES
TABLE A: Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 572 144 307 171 118 1312 0 1312
Marginal Costs ($/ton) 186 584 273 233 116 \ \ \
Cost of Abatement ($billion) 37.62 34.37 30.29 12.81 4.67 119.76 0.00 119.76
TABLE B: Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 466 49 201 128 124 968 234 1202
'Hot air' (Mton) \ \ \ \ \ 0 111 111
Permits Market Price ($/ton) 127 127 127 127 127 127 127 127
Cost of Abatement ($billion) 21.16 2.82 9.51 5.16 5.36 44.01 9.95 53.96
Permits exp(-)/imp(+) (Mton) 106 95 106 43 -6 345 -345 0
i.e % of commitment (import) 19% 66% 35% 25% \ 26% \ \
Flows exp(-)/imp(+) ($billion) 13.44 12.06 13.51 5.49 -0.73 43.77 -43.77 0.00
Total Cost ($billion) 34.60 14.88 23.02 10.64 4.64 87.78 -33.82 53.96
Gains from trade ($billion) 3.03 19.49 7.27 2.17 0.03 31.99 33.82 65.81
TABLE C: World trading
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 182 12 73 59 52 378 101 723 1202 51 437 102 42 2 89
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 24 24 24 24 24 24 24 24 24 24 24 24 24 24 24
Cost of Abatement ($billion) 1.66 0.14 0.71 0.41 0.43 3.36 0.81 6.99 11.15 0.54 4.22 0.95 0.44 0.03 0.81
Permits exp(-)/imp(+) (Mton) 390 132 234 112 66 935 -211 -723 0 -51 -437 -102 -42 -2 -89
i.e % of commitment (import) 68% 92% 76% 66% 56% 71% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 9.27 3.15 5.57 2.67 1.57 22.24 -5.03 -17.21 0.00 -1.21 -10.40 -2.44 -0.99 -0.06 -2.12
Total Cost ($billion) 10.94 3.29 6.29 3.09 2.01 25.60 -4.22 -10.22 11.15 -0.68 -6.17 -1.49 -0.55 -0.03 -1.31
Gains from trade ($billion) 26.69 31.08 24.00 9.73 2.66 94.16 4.22 10.22 108.61 0.68 6.17 1.49 0.55 0.03 1.31
36
BASIC CASES, low scenario
TABLE A': Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 481 132 266 154 98 1132 0 1132
Marginal Costs ($/ton) 135 510 210 187 81 \ \ \
Cost of Abatement ($billion) 23.19 27.74 20.36 9.24 2.71 83.24 0.00 83.24
TABLE B': Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 385 37 164 109 103 799 196 995
'Hot air' (Mton) \ \ \ \ \ 0 136 136
Permits Market Price ($/ton) 90 90 90 90 90 90 90 90
Cost of Abatement ($billion) 12.47 1.54 5.58 3.05 3.17 25.81 5.88 31.69
Permits exp(-)/imp(+) (Mton) 96 95 102 46 -5 333 -333 0
i.e % of commitment (import) 20% 72% 38% 30% \ 29% \ \
Flows exp(-)/imp(+) ($billion) 8.60 8.48 9.10 4.10 -0.48 29.79 -29.79 0.00
Total Cost ($billion) 21.08 10.01 14.67 7.14 2.69 55.59 -23.90 31.69
Gains from trade ($billion) 2.11 17.73 5.69 2.10 0.02 27.65 23.90 51.55
TABLE C': World trading
USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 152 9 60 52 44 316 86 593 995 41 358 85 33 2 74
'Hot air' (Mton) \ \ \ \ \ 0 136 0 136 \ \ \ \ \ \
Permits Market Price ($/ton) 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18
Cost of Abatement ($billion) 1.04 0.08 0.44 0.26 0.27 2.09 0.51 4.30 6.90 0.32 2.60 0.59 0.26 0.02 0.51
Permits exp(-)/imp(+) (Mton) 330 123 206 103 54 816 -223 -593 0 -41 -358 -85 -33 -2 -74
i.e % of commitment (import) 68% 93% 78% 67% 55% 72% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 5.78 2.16 3.62 1.80 0.94 14.30 -3.91 -10.40 0.00 -0.71 -6.28 -1.49 -0.58 -0.03 -1.30
Total Cost ($billion) 6.82 2.24 4.06 2.06 1.22 16.39 -3.40 -6.10 6.90 -0.39 -3.68 -0.90 -0.32 -0.02 -0.79
Gains from trade ($billion) 16.37 25.50 16.31 7.18 1.49 66.85 3.40 6.10 76.35 0.39 3.68 0.90 0.32 0.02 0.79
BASIC CASES, high scenario
TABLE A'': Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 657 155 346 187 139 1484 0 1484
Marginal Costs ($/ton) 242 656 339 279 159 \ \ \
Cost of Abatement ($billion) 55.77 41.28 42.00 16.83 7.53 163.41 0.00 163.41
TABLE B'': Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 540 61 235 146 143 1124 269 1393
'Hot air' (Mton) \ \ \ \ \ 0 90 90
Permits Market Price ($/ton) 167 167 167 167 167 167 167 167
Cost of Abatement ($billion) 32.09 4.51 14.48 7.81 8.12 67.00 15.06 82.06
Permits exp(-)/imp(+) (Mton) 116 95 111 41 -4 359 -359 0
i.e % of commitment (import) 18% 61% 32% 22% \ 24% \ \
Flows exp(-)/imp(+) ($billion) 19.49 15.84 18.57 6.84 -0.61 60.14 -60.14 0.00
Total Cost ($billion) 51.58 20.35 33.05 14.65 7.51 127.14 -45.08 82.06
Gains from trade ($billion) 4.19 20.93 8.95 2.18 0.01 36.27 45.08 81.36
37
TABLE C'': World trading
USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 210 15 85 66 59 435 114 844 1393 61 510 118 50 3 103
'Hot air' (Mton) \ \ \ \ \ 0 90 0 90 \ \ \ \ \ \
Permits Market Price ($/ton) 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Cost of Abatement ($billion) 2.42 0.22 1.05 0.60 0.63 4.90 1.16 10.26 16.33 0.80 6.19 1.38 0.66 0.04 1.18
Permits exp(-)/imp(+) (Mton) 447 141 260 121 80 1049 -204 -844 0 -61 -510 -118 -50 -3 -103
i.e % of commitment (import) 68% 90% 75% 65% 58% 71% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 13.57 4.27 7.90 3.68 2.43 31.84 -6.20 -25.64 0.00 -1.85 -15.47 -3.60 -1.51 -0.09 -3.11
Total Cost ($billion) 15.98 4.48 8.95 4.28 3.05 36.74 -5.04 -15.37 16.33 -1.05 -9.28 -2.21 -0.85 -0.05 -1.94
Gains from trade ($billion) 39.79 36.80 33.05 12.56 4.48 126.67 5.04 15.37 147.09 1.05 9.28 2.21 0.85 0.05 1.94
IMPORT LIMITATIONS
TABLE D: 75%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 178 36 77 58 51 399 99 704 1202 49 425 100 40 2 87
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 23 23 23 23 23 23 23 23 23 23 23 23 23 23 23
Cost of Abatement ($billion) 1.56 1.42 0.81 0.39 0.41 4.58 0.76 6.54 11.88 0.50 3.96 0.89 0.41 0.03 0.76
Permits exp(-)/imp(+) (Mton) 394 108 230 113 67 913 -209 -704 0 -49 -425 -100 -40 -2 -87
i.e % of commitment (import) 69% 75% 75% 66% 57% 68% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 8.99 2.47 5.26 2.59 1.54 20.84 -4.77 -16.07 0.00 -1.13 -9.70 -2.28 -0.92 -0.05 -1.98
Total Cost ($billion) 10.55 3.89 6.06 2.97 1.94 25.42 -4.02 -9.52 11.88 -0.63 -5.75 -1.39 -0.51 -0.03 -1.22
Gains from trade ($billion) 27.07 30.48 24.22 9.84 2.73 94.34 4.02 9.52 107.88 0.63 5.75 1.39 0.51 0.03 1.22
D gain in % / no limit (table C) 1 -2 1 1 2 0 -5 -7 -1 -7 -7 -7 -7 -8 -7
TABLE E: 50%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 72 154 86 59 656 73 473 1202 31 286 69 25 1 60
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 13 13 13 13 13 13 13 13 13 13 13 13 13 13 $13
Cost of Abatement ($billion) 5.52 6.66 4.67 1.42 0.63 18.89 0.31 2.50 21.70 0.18 1.52 0.35 0.15 0.01 0.30
Permits exp(-)/imp(+) (Mton) 286 72 154 86 59 656 -183 -473 0 -31 -286 -69 -25 -1 -60
i.e % of commitment (import) 50% 50% 50% 50% 50% 49% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 3.58 0.90 1.93 1.07 0.74 8.23 -2.30 -5.93 0.00 -0.39 -3.58 -0.86 -0.32 -0.02 -0.76
Total Cost ($billion) 9.10 7.56 6.60 2.50 1.37 27.12 -1.99 -3.42 21.70 -0.21 -2.06 -0.51 -0.17 -0.01 -0.46
Gains from trade ($billion) 28.53 26.81 23.69 10.32 3.30 92.64 1.99 3.42 98.06 0.21 2.06 0.51 0.17 0.01 0.46
D gain in % / no limit (table C) 7 -14 -1 6 24 -2 -53 -67 -10 -69 -67 -65 -69 -71 -65
TABLE F: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 429 108 230 129 89 984 38 180 1202 10 108 28 8 0 25
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 2.02 54.94 0.04 0.28 55.26 0.02 0.17 0.04 0.01 0.00 0.04
Permits exp(-)/imp(+) (Mton) 143 36 77 43 30 328 -148 -180 0 -10 -108 -28 -8 0 -25
i.e % of commitment (import) 25% 25% 25% 25% 25% 24% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 0.48 0.12 0.26 0.15 0.10 1.11 -0.50 -0.61 0.00 -0.03 -0.37 -0.10 -0.03 0.00 -0.09
Total Cost ($billion) 17.27 17.28 14.04 5.35 2.12 56.05 -0.46 -0.33 55.26 -0.02 -0.20 -0.05 -0.01 0.00 -0.05
Gains from trade ($billion) 20.35 17.09 16.25 7.47 2.55 63.72 0.46 0.33 64.51 0.02 0.20 0.05 0.01 0.00 0.05
D gain in % / no limit (table C) -24 -45 -32 -23 -4 -32 -89 -97 -41 -97 -97 -96 -97 -98 -96
38
CDM SURCHARGES
TABLE G: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 198 14 80 63 56 410 108 687 1205 48 415 98 39 2 85
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 27 27 27 27 27 27 27 22 \ 22 22 22 22 22 22
Cost of Abatement ($billion) 2.07 0.18 0.89 0.51 0.54 4.19 1.00 6.15 11.34 0.47 3.72 0.84 0.38 0.02 0.72
Permits exp(-)/imp(+) (Mton) 374 131 227 108 62 902 -219 -687 -3 -48 -415 -98 -39 -2 -85
i.e % of commitment (import) 65% 91% 74% 63% 53% 67% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 10.26 3.58 6.23 2.98 1.70 24.75 -6.01 -15.07 3.68 -1.05 -9.10 -2.14 -0.86 -0.05 -1.86
Total Cost ($billion) 12.32 3.76 7.13 3.49 2.24 28.94 -5.01 -8.92 15.02 -0.59 -5.38 -1.30 -0.48 -0.03 -1.15
Gains from trade ($billion) 25.30 30.60 23.16 9.33 2.43 90.82 5.01 8.92 104.75 0.59 5.38 1.30 0.48 0.03 1.15
D gain in % / no limit (table C) -5 -2 -3 -4 -9 -4 19 -13 -4 -14 -13 -12 -14 -14 -12
TABLE H: 50%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 211 15 86 66 59 436 114 654 1205 45 395 93 37 2 81
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 31 31 31 31 31 31 31 20 \ 20 20 20 20 20 20
Cost of Abatement ($billion) 2.44 0.22 1.06 0.60 0.63 4.95 1.17 5.46 11.58 0.41 3.30 0.75 0.34 0.02 0.64
Permits exp(-)/imp(+) (Mton) 361 129 221 105 59 876 -225 -654 -3 -45 -395 -93 -37 -2 -81
i.e % of commitment (import) 63% 90% 72% 61% 50% 65% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 11.03 3.95 6.76 3.22 1.80 26.76 -6.87 -13.32 6.57 -0.93 -8.05 -1.90 -0.75 -0.04 -1.65
Total Cost ($billion) 13.47 4.17 7.82 3.82 2.43 31.71 -5.70 -7.86 18.15 -0.51 -4.74 -1.15 -0.42 -0.02 -1.01
Gains from trade ($billion) 24.16 30.20 22.46 9.00 2.24 88.06 5.70 7.86 101.61 0.51 4.74 1.15 0.42 0.02 1.01
D gain in % / no limit (table C) -9 -3 -6 -8 -16 -6 35 -23 -6 -24 -23 -23 -24 -26 -22%
TABLE I: 100%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 231 17 95 71 64 479 124 602 1204 41 364 86 34 2 75
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 36 36 36 36 36 36 36 18 \ 18 18 18 18 18 18
Cost of Abatement ($billion) 3.12 0.30 1.36 0.77 0.80 6.34 1.49 4.46 12.30 0.33 2.70 0.61 0.27 0.02 0.53
Permits exp (-)/imp(+) (Mton) 341 127 212 100 54 834 -235 -602 -2 -41 -364 -86 -34 -2 -75
i.e % of commitment (import) 60% 88% 69% 59% 45% 62% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 12.22 4.56 7.62 3.60 1.93 29.92 -8.41 -10.79 10.71 -0.74 -6.52 -1.55 -0.60 -0.03 -1.35
Total Cost ($billion) 15.34 4.85 8.98 4.37 2.73 36.26 -6.92 -6.33 23.01 -0.41 -3.82 -0.93 -0.33 -0.02 -0.82
Gains from trade ($billion) 22.29 29.52 21.31 8.45 1.94 83.50 6.92 6.33 96.76 0.41 3.82 0.93 0.33 0.02 0.82
D gain in % / no limit (table C) -16 -5 -11 -13 -27 -11 64 -38 -11 -40 -38 -37 -40 -42 -37
NON-COMPETITIVE BEHAVIOR
TABLE J: World trading, CDM monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 317 28 133 92 86 656 164 382 1202 24 230 56 20 1 50
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63
Cost of Abatement ($billion) 7.29 0.82 3.24 1.78 1.86 14.99 3.45 1.52 19.96 0.10 0.92 0.22 0.08 0.00 0.19
Permits exp(-)/imp(+) (Mton) 255 116 174 79 32 656 -275 -382 0 -24 -230 -56 -20 -1 -50
i.e % of commitment (import) 45% 81% 57% 46% 27% 50% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.99 7.30 10.91 4.99 2.00 41.19 -17.24 -23.94 0.00 -1.52 -14.46 -3.54 -1.23 -0.06 -3.13
Total Cost ($billion) 23.28 8.12 14.14 6.77 3.86 56.17 -13.79 -22.43 19.96 -1.42 -13.54 -3.33 -1.15 -0.06 -2.94
Gains from trade ($billion) 14.34 26.25 16.15 6.05 0.80 63.59 13.79 22.43 99.81 1.42 13.54 3.33 1.15 0.06 2.94
39
TABLE K: World trading, CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 417 42 179 116 112 866 51 285 1202 17 172 43 14 1 38
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 108 108 108 108 108 108 108 108 108 108 108 108 108 108 108
Cost of Abatement ($billion) 15.58 1.99 6.99 3.80 3.96 32.31 0.11 0.77 33.20 0.05 0.47 0.11 0.04 0.00 0.10
Permits exp(-)/imp(+) (Mton) 154 102 128 55 7 446 -161 -285 0 -17 -172 -43 -14 -1 -38
i.e % of commitment (import) 27% 71% 42% 32% 6% 34% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.69 11.06 13.89 5.95 0.70 48.29 -17.47 -30.82 0.00 -1.86 -18.58 -4.66 -1.51 -0.08 -4.15
Total Cost ($billion) 32.28 13.05 20.87 9.75 4.66 80.61 -17.36 -30.05 33.20 -1.81 -18.11 -4.54 -1.47 -0.07 -4.05
Gains from trade ($billion) 5.35 21.32 9.41 3.06 0.01 39.16 17.36 30.05 86.57 1.81 18.11 4.54 1.47 0.07 4.05
TABLE L: 50% - CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 417 72 179 116 111 895 48 259 1202 15 156 39 12 1 35
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 103 103 103 103 103 103 103 103 103 103 103 103 103 103 103
Cost of Abatement ($billion) 15.52 6.66 6.96 3.78 3.94 36.85 0.09 0.63 37.56 0.04 0.38 0.09 0.03 0.00 0.08
Permits exp(-)/imp(+) (Mton) 155 72 129 55 7 417 -158 -259 0 -15 -156 -39 -12 -1 -35
i.e % of commitment (import) 27% 50% 42% 32% 6% 31% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.02 7.46 13.30 5.70 0.69 43.16 -16.36 -26.80 0.00 -1.60 -16.14 -4.08 -1.29 -0.06 -3.64
Total Cost ($billion) 31.53 14.11 20.25 9.49 4.63 80.01 -16.27 -26.17 37.56 -1.56 -15.76 -3.98 -1.26 -0.06 -3.56
Gains from trade ($billion) 6.09 20.26 10.03 3.33 0.04 39.75 16.27 26.17 82.20 1.56 15.76 3.98 1.26 0.06 3.56
D gain in % / no limit (table C) -77 -35 -58 -66 -98 -58 285 156 -24 129 155 168 128 106 173
INEFFICIENT SUPPLY - 50%
TABLE M: competitive case
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 24 120 84 78 593 75 590 1257 45 355 81 36 2 70
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 52 52 52 52 52 52 52 52 52 52 52 52 52 52 52
Cost of Abatement ($billion) 5.53 0.59 2.45 1.36 1.42 11.34 1.32 11.98 24.63 0.98 7.20 1.59 0.80 0.06 1.35
Permits exp(-)/imp(+) (Mton) 285 120 188 87 40 720 -130 -590 0 -45 -355 -81 -36 -2 -70
i.e % of commitment (import) 50% 83% 61% 51% 34% 55% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 14.94 6.29 9.82 4.55 2.08 37.67 -6.82 -30.86 0.00 -2.33 -18.59 -4.25 -1.90 -0.12 -3.66
Total Cost ($billion) 20.47 6.88 12.26 5.90 3.49 49.01 -5.50 -18.88 24.63 -1.35 -11.39 -2.66 -1.10 -0.07 -2.31
Gains from trade ($billion) 17.15 27.48 18.03 6.91 1.18 70.75 5.50 18.88 95.13 1.35 11.39 2.66 1.10 0.07 2.31
D gain in % / no limit (table C) -36 -12 -25 -29 -56 -25 30 85 -12 99 85 79 100 121 77
TABLE N: CDM monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 385 37 164 109 103 799 98 360 1257 25 217 51 21 1 44
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90
Cost of Abatement ($billion) 12.48 1.54 5.58 3.05 3.17 25.83 2.94 3.45 32.22 0.26 2.09 0.47 0.22 0.01 0.40
Permits exp(-)/imp(+) (Mton) 186 107 143 63 15 513 -153 -360 0 -25 -217 -51 -21 -1 -44
i.e % of commitment (import) 33% 74% 46% 37% 12% 39% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.68 9.56 12.79 5.62 1.31 45.97 -13.74 -32.23 0.00 -2.27 -19.46 -4.57 -1.85 -0.11 -3.97
Total Cost ($billion) 29.17 11.10 18.37 8.67 4.48 71.79 -10.80 -28.77 32.22 -2.01 -17.38 -4.10 -1.63 -0.09 -3.57
Gains from trade ($billion) 8.46 23.27 11.91 4.15 0.19 47.97 10.80 28.77 87.54 2.01 17.38 4.10 1.63 0.09 3.57
D gain in % / no limit (table C) -68 -25 -50 -57 -93 -49 156 181 -19 196 182 175 197 212 173
40
TABLE O: CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 434 45 187 121 116 902 45 310 1257 21 187 44 17 1 39
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 112 112 112 112 112 112 112 112 112 112 112 112 112 112 112
Cost of Abatement ($billion) 17.43 2.26 7.82 4.25 4.42 36.18 0.28 2.40 38.87 0.18 1.45 0.33 0.15 0.01 0.28
Permits exp(-)/imp(+) (Mton) 137 100 121 51 2 410 -100 -310 0 -21 -187 -44 -17 -1 -39
i.e % of commitment (import) 24% 69% 39% 30% 2% 31% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.31 11.13 13.46 5.67 0.24 45.82 -11.17 -34.65 0.00 -2.39 -20.94 -4.96 -1.94 -0.11 -4.32
Total Cost ($billion) 32.74 13.39 21.29 9.92 4.67 82.00 -10.89 -32.25 38.87 -2.21 -19.48 -4.63 -1.79 -0.10 -4.04
Gains from trade ($billion) 4.89 20.98 9.00 2.89 0.00 37.76 10.89 32.25 80.90 2.21 19.48 4.63 1.79 0.10 4.04
D gain in % / no limit (table C) -82 -33 -62 -70 -100 -60 158 215 -26 225 216 211 226 234 209
TABLE P: competitive case - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 72 154 86 71 668 68 522 1257 39 315 72 32 2 62
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 43 43 43 43 43 43 43 43 43 43 43 43 43 43 43
Cost of Abatement ($billion) 5.52 6.66 4.67 1.42 1.05 19.31 0.97 8.75 29.03 0.70 5.27 1.17 0.58 0.04 0.99
Permits exp(-)/imp(+) (Mton) 286 72 154 86 47 645 -123 -522 0 -39 -315 -72 -32 -2 -62
i.e % of commitment (import) 50% 50% 50% 50% 40% 49% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 12.22 3.08 6.57 3.66 2.03 27.56 -5.26 -22.30 0.00 -1.66 -13.45 -3.09 -1.35 -0.09 -2.67
Total Cost ($billion) 17.73 9.74 11.24 5.08 3.08 46.87 -4.29 -13.55 29.03 -0.95 -8.18 -1.92 -0.78 -0.05 -1.67
Gains from trade ($billion) 19.89 24.63 19.05 7.73 1.59 72.89 4.29 13.55 90.73 0.95 8.18 1.92 0.78 0.05 1.67
D gain in % / no limit (table C) -25 -21 -21 -21 -40 -23 1 33 -16 41 33 29 41 51 28
TABLE Q: CDM monopoly - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 379 72 161 107 102 821 97 339 1257 24 205 48 19 1 42
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87
Cost of Abatement ($billion) 11.91 6.66 5.32 2.91 3.03 29.82 2.81 2.99 35.63 0.23 1.81 0.41 0.19 0.01 0.35
Permits exp(-)/imp(+) (Mton) 193 72 146 64 16 491 -152 -339 0 -24 -205 -48 -19 -1 -42
i.e % of commitment (import) 34% 50% 47% 38% 14% 37% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.74 6.26 12.65 5.59 1.41 42.65 -13.19 -29.46 0.00 -2.06 -17.80 -4.19 -1.68 -0.10 -3.64
Total Cost ($billion) 28.65 12.91 17.98 8.49 4.44 72.47 -10.38 -26.47 35.63 -1.83 -15.99 -3.78 -1.49 -0.08 -3.30
Gains from trade ($billion) 8.98 21.45 12.31 4.32 0.23 47.29 10.38 26.47 84.14 1.83 15.99 3.78 1.49 0.08 3.30
D gain in % / no limit (table C) -66 -31 -49 -56 -91 -50 146 159 -23 170 159 154 170 182 152
TABLE R: CDM+FSU monopoly - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 432 72 186 120 115 926 42 289 1257 20 175 42 16 1 36
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 111 111 111 111 111 111 111 111 111 111 111 111 111 111 111
Cost of Abatement ($billion) 17.20 6.66 7.72 4.19 4.36 40.14 0.24 2.02 42.40 0.15 1.23 0.28 0.12 0.01 0.24
Permits exp(-)/imp(+) (Mton) 139 72 121 51 3 387 -98 -289 0 -20 -175 -42 -16 -1 -36
i.e % of commitment (import) 24% 50% 40% 30% 2% 29% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.40 7.98 13.45 5.68 0.30 42.81 -10.81 -32.00 0.00 -2.18 -19.34 -4.60 -1.77 -0.10 -4.02
Total Cost ($billion) 32.61 14.64 21.17 9.88 4.66 82.95 -10.57 -29.98 42.40 -2.03 -18.11 -4.32 -1.65 -0.09 -3.78
Gains from trade ($billion) 5.02 19.73 9.12 2.94 0.01 36.81 10.57 29.98 77.36 2.03 18.11 4.32 1.65 0.09 3.78
D gain in % / no limit (table C ) -81 -37 -62 -70 -100 -61 150 193 -29 199 193 190 199 203 189
41
TABLE S: competitive case - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton ) 429 108 230 129 89 984 36 236 1257 16 143 34 13 1 30
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ ton) 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 2.02 54.94 0.15 1.25 56.34 0.09 0.76 0.18 0.07 0.00 0.15
Permits exp(-)/imp(+) (Mton) 143 36 77 43 30 328 -92 -236 0 -16 -143 -34 -13 -1 -30
i.e % of commitmen t (import) 25% 25% 25% 25% 25% 25% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+ ) ( $billion) 1.79 0.45 0.96 0.54 0.37 4.11 -1.15 -2.96 0.00 -0.20 -1.79 -0.43 -0.16 -0.01 -0.38
Total Cost ($billion) 18.58 17.61 14.74 5.74 2.39 59.05 -1.00 -1.71 56.34 -0.11 -1.03 -0.26 -0.09 0.00 -0.23
Gains from trade ($billion) 19.05 16.76 15.55 7.07 2.28 60.71 1.00 1.71 63.42 0.11 1.03 0.26 0.09 0.00 0.23
D gain in % / no limit (table C) -29 -46 -35 -27 -14 -36 -76 -83 -42 -84 -83 -83 -84 -85 -83
TABLE T: CDM monopoly - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 429 108 230 129 114 1010 108 139 1257 8 84 21 7 0 19
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 109 109 109 109 109 109 109 109 109 109 109 109 109 109 109
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 4.26 57.18 3.95 0.36 61.49 0.02 0.22 0.05 0.02 0.00 0.05
Permits exp(-)/imp(+) (Mton) 143 36 77 43 4 302 -164 -139 0 -8 -84 -21 -7 0 -19
i.e % of commitmen t (import) 25% 25% 25% 25% 3% 23% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+)($billion) 15.57 3.93 8.37 4.67 0.40 32.93 -17.83 -15.10 0.00 -0.91 -9.10 -2.29 -0.73 -0.04 -2.04
Total Cost ($billion) 32.36 21.08 22.14 9.87 4.66 90.11 -13.88 -14.74 61.49 -0.89 -8.88 -2.23 -0.72 -0.04 -1.99
Gains from trade ($billion) 5.27 13.29 8.14 2.94 0.01 29.66 13.88 14.74 58.27 0.89 8.88 2.23 0.72 0.04 1.99
D gain in % / no limit (table C) -80 -57 -66 -70 -100 -69 229 44 -46 31 44 50 30 18 52
TABLE U: CDM+FSU monopoly - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions /ref 2010 (Mton) 447 108 230 129 119 1034 31 192 1257 12 116 28 10 1 25
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 118 118 118 118 118 118 118 118 118 118 118 118 118 118 118
Cost of Abatement ($billion) 18.92 17.15 13.77 5.20 4.80 59.85 0.10 0.77 60.72 0.05 0.47 0.11 0.04 0.00 0.09
Permits exp(-)/imp(+) (Mton) 124 36 77 43 -1 279 -87 -192 0 -12 -116 -28 -10 -1 -25
i.e % of commitment (import) 22% 25% 25% 25% \ 21% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 14.64 4.25 9.06 5.05 -0.13 32.87 -10.22 -22.65 0.00 -1.44 -13.68 -3.35 -1.17 -0.06 -2.96
Total Cost ($billion) 33.55 21.41 22.83 10.26 4.67 92.71 -10.12 -21.88 60.71 -1.39 -13.21 -3.24 -1.12 -0.06 -2.86
Gains from trade ($billion) 4.07 12.96 7.46 2.56 0.00 27.05 10.12 21.88 59.05 1.39 13.21 3.24 1.12 0.06 2.86
D gain in % / no limit (table C) -85 -58 -69 -74 -100 -71 140 114 -46 105 114 118 104 94 119
OTHER INEFFICIENT SUPPLIES: 25%, 15%, 10%, 5%, competitive cases
TABLE V: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 395 39 169 111 106 819 50 415 1285 33 250 56 27 2 48
'Hot air' (Mton) \ \ \ \ \ 0 28 0 28 \ \ \ \ \ \
Permits Market Price ($/ton) 94 94 94 94 94 94 94 94 94 94 94 94 94 94 94
Cost of Abatement ($billion) 13.37 1.67 5.98 3.26 3.40 27.68 1.58 14.67 43.92 1.23 8.79 1.92 1.01 0.08 1.63
Permits exp(-)/imp(+) (Mton) 177 105 138 60 12 493 -78 -415 0 -33 -250 -56 -27 -2 -48
i.e % of commitment(import) 31% 73% 45% 35% 10% 38% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.55 9.88 12.97 5.66 1.14 46.21 -7.30 -38.91 0.00 -3.05 -23.40 -5.27 -2.50 -0.17 -4.52
Total Cost ($billion) 29.92 11.54 18.96 8.93 4.54 73.89 -5.72 -24.24 43.92 -1.82 -14.60 -3.35 -1.49 -0.10 -2.89
Gains from trade ($billion) 7.70 22.82 11.33 3.89 0.13 45.88 5.72 24.24 75.84 1.82 14.60 3.35 1.49 0.10 2.89
D gain in % / no limit (table C) -71 -27 -53 -60 -95 -51 35 137 -30 168 137 125 170 220 121
42
TABLE W: 15%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 465 49 200 128 123 965 35 296 1296 24 178 40 19 1 34
'Hot air' (Mton) \ \ \ \ \ 0 17 0 17 \ \ \ \ \ \
Permits Market Price ($/ton) 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126
Cost of Abatement ($billion) 21.00 2.79 9.44 5.12 5.32 43.68 0.54 6.04 50.26 0.56 3.60 0.75 0.46 0.04 0.63
Permits exp(-)/imp(+) (Mton) 107 95 107 44 -5 347 -52 -296 0 -24 -178 -40 -19 -1 -34
i.e % of commitment (import) 19% 66% 35% 25% -5% 26% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 13.53 12.02 13.51 5.50 -0.68 43.88 -6.52 -37.36 0.00 -2.98 -22.44 -5.03 -2.44 -0.18 -4.30
Total Cost ($billion) 34.53 14.82 22.96 10.62 4.64 87.56 -5.98 -31.32 50.26 -2.42 -18.84 -4.27 -1.98 -0.13 -3.67
Gains from trade ($billion) 3.09 19.55 7.33 2.20 0.03 32.20 5.98 31.32 69.51 2.42 18.84 4.27 1.98 0.13 3.67
D gain in % / no limit (table C) -88 -37 -69 -77 -99 -66 42 206 -36 256 205 187 259 347 181
TABLE X: 10%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010
(Mton)
509 56 221 139 135 1059 25 217 1301 17 130 29 14 1 25
'Hot air' (Mton) \ \ \ \ \ 0 11 0 11 \ \ \ \ \ \
Permits Market Price ($/ton) 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
Cost of Abatement ($billion) 27.16 3.74 12.24 6.61 6.88 56.62 0.21 2.76 59.59 0.27 1.64 0.33 0.23 0.02 0.27
Permits exp(-)/imp(+) (Mton) 62 88 87 33 -17 253 -36 -217 0 -17 -130 -29 -14 -1 -25
i.e % of commitment (import) 11% 61% 28% 19% -14% 19% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 9.36 13.24 12.99 4.90 -2.50 37.98 -5.47 -32.52 0.00 -2.61 -19.52 -4.36 -2.14 -0.16 -3.73
Total Cost ($billion) 36.51 16.97 25.23 11.51 4.38 94.60 -5.26 -29.75 59.59 -2.34 -17.88 -4.03 -1.91 -0.13 -3.46
Gains from trade ($billion) 1.11 17.40 5.06 1.30 0.29 25.16 5.26 29.75 60.18 2.34 17.88 4.03 1.91 0.13 3.46
D gain in % / no limit (table C) -96 -44 -79 -87 -89 -73 25 191 -45 244 190 171 248 348 165
TABLE Y: 5%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 563 64 245 152 148 1172 14 120 1307 10 72 16 8 1 14
'Hot air' (Mton) \ \ \ \ \ 0 6 0 6 \ \ \ \ \ \
Permits Market Price ($/ton) 181 181 181 181 181 181 181 181 181 181 181 181 181 181 181
Cost of Abatement ($billion) 36.05 5.13 16.28 8.77 9.12 75.35 0.04 0.67 76.05 0.07 0.39 0.07 0.06 0.01 0.06
Permits exp(-)/imp(+) (Mton) 9 80 62 20 -30 140 -20 -120 0 -10 -72 -16 -8 -1 -14
i.e % of commitment (import) 2% 55% 20% 11% -26% 11% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ( $billion) 1.55 14.45 11.25 3.54 -5.47 25.33 -3.53 -21.80 0.00 -1.76 -13.08 -2.91 -1.45 -0.11 -2.49
Total Cost ($billion) 37.60 19.58 27.53 12.32 3.65 100.68 -3.49 -21.13 76.05 -1.69 -12.69 -2.84 -1.39 -0.10 -2.43
Gains from trade ($billion) 0.02 14.79 2.76 0.50 1.02 19.09 3.49 21.13 43.71 1.69 12.69 2.84 1.39 0.10 2.43
D gain in % /no limit (table C) -100 -52 -89 -95 -62 -80 -17 107 -60 149 106 91 152 236 86
A. Denny Ellerman, Henry D. Jacoby and Annelène Decaux*
Abstract
This paper examines the effect of the Kyoto Protocol on developing economies using marginal abatement curves
generated by MIT’s Emissions Prediction and Policy Assessment model (EPPA). In particular, the paper addresses
how developing countries are affected by the scope of CO2 emissions trading, by various limitations that Annex I
countries might place on emissions trading, by the nature of the Clean Development Mechanism, and by changes
in the international trade flows in conventional goods and services. In general, it is found that developing
countries benefit from emissions trading, both from the new export opportunities and by the lesser distortion of
Annex I economies. This effect is particularly pronounced for energy exporting countries since Annex I countries
are able to substitute cheaper reductions of coal emissions in developing countries for more expensive reductions
of oil emissions within Annex I. The paper also highlights the implications of the apparent inelastic demand for
tradable permits from non-Annex I countries and the conflict between revenue maximization and other goals
assigned to the Clean Development Mechanism.
Contents
1. INTRODUCTION .........................................................................................................1
2. THREE BASIC CASES: No Trading, Annex B Trading and Full Global Trading..............................3
2.1 The Autarkic, No-Trading Case ................................................................................3
2.2 Annex B Trading..................................................................................................4
2.3 Full Global Trading ..............................................................................................6
2.4 Effect of Higher and Lower Economic Growth ..............................................................7
2.5 Per Capita Emissions............................................................................................9
3. IMPORT LIMITATIONS...............................................................................................10
4. CDM “SURCHARGES” AND CARTELIZATION OF SUPPLY ..................................................12
4.1 CDM Surcharges................................................................................................12
4.2 Cartelization of Supply .......................................................................................14
5. INEFFICIENT SUPPLY................................................................................................15
6. INTERNATIONAL TRADE IN ENERGY AND NON-ENERGY GOODS ........................................17
6.1 Trade in Goods with No Emissions Trading ...............................................................18
6.2 Comparing the No-Trading Case with Full Global Trading.............................................20
6.3 Summary .........................................................................................................20
7. CONCLUDING OBSERVATIONS....................................................................................21
8. ACKNOWLEGMENTS.................................................................................................22
9. REFERENCES...........................................................................................................22
APPENDIX A: MARGINAL ABATEMENT CURVES................................................................25
A.1 What are Marginal Abatement Curves and What Do They Represent? ...............................25
A.2 How Can MACs Be Used for Trade Studies?...............................................................25
A.3 How are MACs Generated from CGE Models?............................................................26
A.4 Assessing the “Robustness” of MACs with Regard to the Policy Applied.........................29
A.5 Analytical Approximations: A Simple Tool for Trade Studies........................................30
A.6 Construction of Aggregate Supply and Demand Curves................................................31
APPENDIX B: DATA TABLES..........................................................................................34
* Ellerman is Senior Lecturer at the Sloan School of Management and Executive Director of the MIT Global Change
Joint Program; Jacoby is the William F. Pounds Professor of Management at the Sloan School and Co-Director of
the Joint Program; and Decaux is a candidate for a Master’s degree from MIT’s Technology and Policy Program
and a Research Assistant with the Joint Program.
1
1. INTRODUCTION
The Kyoto Protocol recognizes a strong linkage between CO2 emission reduction goals, emissions
trading, and the role of developing economies. Annex B parties, generally the industrialized
nations, have set targets that, for most, imply a significant reduction of CO2-equivalent emissions
by 2010. The ability and even willingness of Annex B parties to achieve these targets will depend
on the cost of abatement. The cheapest sources of CO2 emission reductions are found, not in the
Annex B countries, but in the developing economies (or non-Annex B parties), which for historic
and equity reasons are not expected to contribute to the global emissions reduction in the near term.
Since the location of CO2 emissions does not matter from a global warming perspective, the
achievement of the Kyoto targets will depend in large part upon the ability of Annex B countries to
substitute cheaper emission reductions in non-Annex B regions for equivalent abatement at home.
In providing a mechanism for this exchange, emissions trading not only reduces the cost of
meeting the Kyoto goals for Annex B parties, but also provides a new source of export earnings
for non-Annex B parties.
Developing country interest in emissions trading is not limited to the potential for new export
earnings. Achieving the goals set at Kyoto will change patterns of consumption and production
within Annex B nations; and these changes will have inevitable effects on the flows of internationally
traded goods. As a result, developing countries will be affected through conventional trade linkages
with the Annex B countries; however, these effects, both favorable and unfavorable, will be
diminished to the extent that emissions trading reduces the cost of achieving the Kyoto targets.
In examining the effects of the Kyoto Protocol upon non-Annex B parties, we assume that the
Annex B goals are met, and we focus in particular on how emissions trading would affect the
developing countries. We refer to emissions trading generically, to include bubbles, joint
implementation, allowance or credit systems, and perhaps other forms yet to be devised. The chief
practical distinction among these forms concerns the transaction cost involved in effecting an
individual trade.
The paper relies heavily upon the use of marginal abatement curves (MACs). These curves
represent the marginal cost of reducing carbon emissions by different amounts within an economy.
The details of their construction, and the elaboration of the aggregate demand and supply curves
for carbon permits which are drawn from them, are explained in Appendix A. The MACs used
here are generated using MIT’s Emissions Prediction and Policy Assessment (EPPA) model (Yang
et al. 1996). This is a multi-sectoral, multi-regional, computable general equilibrium (CGE) model
of global economic activity, energy use and carbon emissions. The underlying model simulates real
emission reductions, so that our analysis implicitly assumes that the “additionality” criterion
established in the Kyoto Protocol [Arts. 6.1(b) and 12.5(c)] is satisfied. We do not attempt to
address the considerable political and practical problems of measurement and verification that are
associated with this criterion, but we will account for the effect of these problems in a subsequent
section.1
1 UNCTAD (1998) contains an excellent discussion of these issues.
2
The main body of the paper consists of five sections. Section 2 uses the MACs to analyze three
basic cases: no emissions trading, emissions trading limited to Annex B parties (including the
Former Soviet Union), and full global trading. Results are presented in graphical form in the text,
and the regional detail—in terms of abatement, costs, emission permit trade and prices for all the
cases discussed—is presented in tabular form in Appendix B.
The next three sections address the effects of various departures from the three basic cases. The
first departure, in Section 3, is the effect of limitations on imports of emission permits, as might
correspond to the “supplementarity” criterion included in the Kyoto Protocol [Arts. 6.1(d) and 17]
or to the recent call by the EU environmental ministers for a “concrete ceiling” on emissions
trading. Section 4 evaluates the effect of surcharges on emission permits generated under the Clean
Development Mechanism (CDM), as also provided in the Kyoto Protocol [Art. 12.8], and of noncompetitive
pricing. The third departure, discussed in Section 5, is the effect of a smaller supply of
permits from the non-Annex B regions than is indicated by EPPA’s assumptions of complete
economic rationality and zero transaction costs, which we term “inefficient supply.”
In Sections 2 through 5, the measure of welfare used is the total direct resource cost required to
meet the emissions constraint. As explained in Appendix A, for any country this cost is the area
under its marginal abatement curve up to any point of constraint, corrected for any purchase or sale
of emissions permits. This is the conventional measure which is generated using the MAC approach.
However, because the MACs are generated at the country level, they are not able to take account of
effects that are mediated through international trade in energy or other goods. As shown in Appendix
A, the MAC results themselves are not sensitive to trade effects. Nevertheless, these effects will
influence sub-national details, such as patterns of trade in particular goods and activity at the sectoral
level. To explore these effects, we depart from the MAC analysis in Section 6, and present results
taken directly from the EPPA model. In Section 7 we offer some concluding observations.
In conducting our analysis, we will make frequent reference to the twelve regions represented
in EPPA, which are listed below with the model’s acronyms. The CO2 emission reductions
required of Annex B regions are calculated as the differences between EPPA’s predicted emissions
for these regions in 2010 and the goals established at Kyoto for the constituent parties, which are
generally stated as a percentage of 1990 emissions, as indicated in Table 1.2
Definition of Regions in the EPPA Model
ANNEX B REGIONS2 NON-ANNEX B REGIONS
USA: USA EEX: Energy Exporting Countries
JPN: Japan CHN: China
EEC: European Union (EC-12 as of 1992) IND: India
OOE: Other OECD Countries DAE: Dynamic Asian Economies
EET: Eastern Europe BRA: Brazil
FSU: Former Soviet Union ROW: Rest of World
2 Under Kyoto Protocol accounting, as best it is understood, this procedure involves the implicit assumption that all
other greenhouse gases are also reduced by the same percentage below the appropriate baseline value for each. No
costs are included for these controls in our study, nor is any account taken of possible carbon sinks.
3
Table 1. Emissions Levels Corresponding to Kyoto Commitments
USA JPN EEC OOE EET FSU Non-Annex B
Reference emissions 1990 (Mton) 1362 298 822 318 266 891 2022
Reference emissions 2010 (Mton) 1838 424 1064 472 395 763 4142
Kyoto commitments / 1990 93% 94% 92% 94.5% 104% 98% NA
Hence Emissions Target in 2010 (Mton) 1267 280 756 301 273 873 4142
i.e. Reduction / ref (Mton) 571 144 308 171 118 0 NA
i.e. Reduction / ref (%) 31% 34% 29% 36% 30% 0 NA
“hot air” (Mton) 0 0 0 0 0 111 NA
Only five of the six EPPA regions encompassing Annex B countries are constrained by the
commitment made at Kyoto3 and these five will subsequently be termed the Kyoto-constrained
regions. For the sixth Annex B region, the FSU, emissions are predicted to be below the aggregate
level to which the principal nations constituting the FSU¾Russia, the Ukraine, and the
Baltics¾committed at Kyoto. The difference between the FSU commitment and predicted
emissions is controversially called “hot air,” but in our analysis we assume that it constitutes a
“right to emit” that can be exported. For the non-Annex B regions, as well as for the FSU, any
reduction from 2010 reference emissions also generates a permit for export to the Kyotoconstrained
regions.
2. THREE BASIC CASES: No Trading, Annex B Trading and Full Global Trading
Three basic cases are used to illustrate the effects of the Kyoto Protocol and the role of emissions
trading. The first case is an autarkic one in which Annex B parties meet their Kyoto commitments
without any emissions trading. As a result, the FSU and non-Annex B regions are affected only
through the prices and quantities of goods traded with the Kyoto-constrained regions. In the
second case, Annex B parties (including the FSU) trade emission permits among themselves.
Emissions trading within Annex B reduces the costs of the Kyoto commitment for the constrained
regions, and the FSU finds a new source of export revenue; but non-Annex B countries will
continue to be affected only through conventional trade linkages. The third basic case examines
emissions trading on a global scale in which non-Annex B countries join the FSU in earning export
revenue from supplying permits to Annex B countries. Further variations of these basic cases will
be developed in subsequent sections, but these three frame the salient alternatives.
2.1 The Autarkic, No-Trading Case
Figure 1 presents the MACs and the costs associated with the carbon emission reductions
required of each of the Kyoto-constrained regions (excluding the FSU) when there is no emissions
3 The Kyoto Protocol refers to the targets established for Annex B parties as “legally binding commitments,”
although neither the legal structure nor the sanctioning mechanism are evident. In this paper, we use the terms
“goals,” “targets,” and “commitments” more or less interchangeably.
4
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
Abatement Cost
$34 billion
OOE
Abatement Cost
$13 billion EEC
Abatement Cost
$30 billion USA
Abatement Cost
$38 billion
Total Cost:
$120 billion
EET
Abatement Cost
$5 billion
Figure 1. Annex B Regions Meeting their Kyoto Commitment, No Trading. (Table A)
trading.4 The diamond symbols on the MACs indicate, on the horizontal axis, the quantity of
abatement required of each region (cf. Table 1), and, on the vertical axis, the shadow price of
carbon for the region. The shadow price is the marginal cost for the last ton abated. The autarkic
marginal cost of abatement for Japan ($584/ton) is much higher than the marginal costs for the
EEC ($273), the OOE ($233), the USA ($186), or the EET ($116). The areas under the curves
represent the total costs of abatement for each region, which sum to $120 billion.5 The details are
shown in Appendix B, Table A.
With no emissions trading, there are no export earnings for the FSU or the non-Annex B
regions. None of these regions would have any incentive to abate in order to generate “rights to
emit” for export; and, of course, the FSU would not be able to export its “hot air.”
2.2 Annex B Trading
Figure 2 shows the effect of Annex B trading on the Kyoto-constrained regions. At the market
clearing price of $127/ton, the OECD regions (USA, EEC, JPN, OOE) are importers of permits and
the EET and FSU are exporters. As an unconstrained Annex B party, the FSU accounts for virtually
all of the exports (98%). As shown in Figure 3, about a third of these consist of “hot air,” with a
cost of zero; but the remaining exports are generated by abatement undertaken to earn additional
export profits up to the point where marginal abatement cost equals the market price. It costs the
FSU $10 billion to abate 234 megatons (Mton), but the permits can be sold for $30 billion for a net
gain of $20 billion. When added to the $14 billion earned for exporting 111 Mton of the unused
Kyoto entitlement, the FSU’s total gain from emissions trading is $34 billion.
4 The MACs for the OOE and EET are virtually identical and are therefore superimposed in Figure 1.
5 All prices and costs are in 1985 US$. Multiplication by 1.5 converts these figures into current (1998) US dollars.
5
$127
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
Savings:
$19 billion
OOE
Savings:
$2 billion
EEC
Savings:
$7 billion
USA
Savings:
$3 billion
Total Savings for
Kyoto-Constrained
Regions: $32 billion
EET
Savings:
$0 billion
Kyoto
Trading
Figure 2. Annex B Meeting their Kyoto Commitment, No Trading/Trading. (Table B)
For the five Kyoto-constrained regions
depicted on Figure 2, the cost of meeting the
Kyoto commitment is reduced by $32 billion. This
is the area of the hatched triangles, which represent
costly domestic abatement avoided by importing
permits for the four OECD regions and the export
earnings for the EET. From the standpoint of
world resource use, the aggregate cost of meeting
the Kyoto commitments is much lower with
Annex B trade ($54 billion) than without ($120
billion). The total gains from emissions trading
are$66 billion, split about evenly between the FSU
FSU
P
Q
$127
Optimal quantity of permits traded (345 Mton)
Emissions
Reduction
(234 Mton)
HOT AIR
(111 Mton)
Figure 3. Trade with FSU: The “Hot Air”
Effect.
($34 billion) and the OECD + EET ($32 billion).
The distribution of the reduction in costs (that is, the gains from emissions trading for the
Kyoto-constrained regions) is distributed roughly in proportion to autarkic marginal cost. The two
regions with the highest autarkic marginal costs, Japan and the EEC, benefit the most from traded
permits. Japan imports 66% of its reduction requirement and reduces its cost by $19 billion. The
EEC imports 35% of its reduction requirement and reduces its cost by $7 billion. These two
regions account for about one-third of the total emission reduction requirement for the five Kyotoconstrained
regions, and about five-sixths of the gains from emissions trading for these regions
accrue to them. The other three regions are characterized by autarkic marginal costs much closer to
the Annex B market price; consequently, they trade much less. The USA and OOE are importers
6
for 19% and 25% of their respective requirements, and the EET reduces emissions by 5% more
than required in order to export permits. The gains for these regions, which account for two-thirds
of the total reduction requirement, total $5 billion, about a sixth of the gains from trading for the
Kyoto-constrained regions.
This distribution of the gains from trade reflects an important feature of emissions trading.
Regions with autarkic marginal cost farther from the trading equilibrium will import or export more
(and benefit more) than those regions with autarkic marginal cost closer to the trading equilibrium.
Thus, Japan and the EEC benefit most from emissions trading among the importers, as does the
FSU, not just because of the “hot air,” but also because its autarkic marginal cost ($0/ton) is far
from the market price.
2.3 Full Global Trading
To illustrate full global trading, we rely on aggregate supply and demand curves for emissions
permits (not abatement), as explained in the Appendix A and illustrated in Figure 4. These curves
indicate the total quantities of permits that would be supplied or demanded at various price levels in
a given market. In Figure 4, there is only one demand curve because the Kyoto-constrained
regions are the same in both the Annex B and the global markets. Only the supply changes,
reflecting the large amount of low-cost carbon abatement that becomes potentially available with the
shift to global trading. The ample supply of permits from non-Annex B regions results in a market
price that is much lower ($24/ton) than in the Annex B trading case. The total cost of reducing
global CO2 emissions to achieve the Kyoto goals is reduced dramatically: $11 billion vs.
$54 billion or $120 billion in the other two cases!
At this price, the Kyoto-constrained regions depend far more on imports than when trading
was restricted to Annex B regions only. In the aggregate, 71% of OECD + EET commitments are
met by importing emission permits from non-constrained regions; and the percentage reliance upon
imports reflects autarkic marginal cost: Japan, 92%; EEC, 76%; USA, 68%; OOE, 66% and
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
World Trading
Demand
Supply
Annex B Trading
Kyoto Cap
Figure 4. Aggregated Supply and Demand Curves for 2010 under Kyoto Constraints. Annex B
Trading / World Trading. (Table C)
7
EET, 56%. On the suppliers’ side, three countries account for the bulk of exports: China (47%),
the FSU (23%) and India (11%), hence 81% altogether. Whether because of relatively small size
or high relative abatement costs, the remaining four non-Annex B regions are small suppliers of
emission permits to the Annex B regions.
With full global trading, the gains from emissions trading are much greater for the Kyotoconstrained
regions ($94 billion vs. $32 billion with Annex B trading). The non-Annex B regions
gain $10 billion by exporting permits, but their gains are markedly less than those of the Kyotoconstrained
regions. The FSU is the only party that is made worse off by this widening of the
market. At $24/ton, the FSU abates about half as much as before, (101 Mton), and the “hot air” is
worth much less. As a result, the FSU’s net gain ($4 billion) in the global market is much less
than its $34 billion gain when it does not compete with the non-Annex B regions.
The distribution of the gains from emissions trading in the global market illustrates again the
feature of emissions trading we just noted: regions whose autarkic marginal cost is further from the
equilibrium price benefit more than regions whose marginal cost is closer to that price. In this
global trading case, the clearing price is much closer to the suppliers’ autarkic marginal cost
($0/ton) than it is to the autarkic marginal cost of any of the importers.
2.4 Effect of Higher and Lower Economic Growth
The three basic cases, and those to be presented hereafter, provide point estimates of prices,
quantities and costs. In this section, we briefly note the effect of different assumptions about
economic growth, namely, that it is 10% higher and 10% lower than in the reference EPPA
projection for all regions. Figure 5 shows the effect of higher and lower growth rates for
illustrative Kyoto-constrained regions (JPN, EEC and USA), and Figure 6 shows the effects on
aggregate supply and demand for permits in the Annex B and full global markets.
0
100
200
300
400
500
600
700
0 100 200 300 400 500 600 700
Carbon Emissions Reductions (Mton)
Shadow Price of Carbon ($/ton)
JPN
EEC
USA
Kyoto
Kyoto low
Kyoto high
Figure 5. Effect of Lower and Higher Growth Rates (± 10%) on the Kyoto Commitment for JPN,
EEC, USA. (Tables A' to C')
8
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply Annex B
Trading
Supply World
Trading
Demand
Kyoto Cap
low high
high
low high
low
Figure 6. World Supply and Demand in 2010 under Kyoto Constraints. Annex B Trading / World
Trading — Low and High Scenarios. (Tables A'' to C'')
The effects of higher or lower growth on emissions is typically fairly small, always less than
± 5%, but the Kyoto commitment is fixed so that the effect on the required reduction is amplified.
For instance, for the Kyoto-constrained regions, the variation in total required emission is ± 13 to
14%. Finally, the change in total costs, without trading, is even greater (± 31–36%), because the
most expensive abatement, that on the margin, represented by the hatched area in Figure 5, is what
is being increased or decreased by the variation in economic growth.
When aggregated into demand and supply curves for permits, the variation in economic growth
has a large effect on demand, but not much on supply since most of the supply comes from
unconstrained regions, the FSU or the non-Annex B countries. The chief effect upon supply
within the relevant price range is through the influence on hot air. Higher growth reduces hot air
and shifts the supply curve inward; and conversely, for lower economic growth.
The effect of higher or lower economic growth on the price and quantities of traded permits is
very different in the Annex B and full global trading markets. In the former, the volumes traded
change very slightly (± 12 Mton), but the price varies greatly (± $40). In a market limited to
Annex B regions, most of the incremental effort required by higher or lower growth translates into
more or less domestic abatement. In contrast, for full global trading, the aggregate supply curve is
flatter, so that the variation in the volume of traded permits is greater (± 120 Mton) but the
variation in price much less (± $6).
The variation in total cost for the Kyoto-constrained regions is slightly greater in the trading
cases than in the non-trading case (± 36–42% vs. ± 31–36%) because with lower or higher
growth, greater or smaller amounts of hot air from the FSU enter the trading system.
9
2.5 Per Capita Emissions
As a further summary statistic, the effect of the Kyoto commitment and of the scope of trading
can be shown in per capita terms. Table 2 provides full regional detail, but the essential features can
be grasped by reference to Figure 7, where per capita emissions in 2010 are shown for the USA,
the five Kyoto-constrained regions as a group, the FSU, the non-Annex B regions, and the world.
The Kyoto commitment reduces per capita emissions in all the Kyoto-constrained regions;
however, the reduction is less severe, the greater the scope of trading. In full global trading, as an
example, per capita emissions are reduced by 14% on a global scale, but by a greater percentage in
the non-Annex B regions since the share of the global emission reduction in the non-Annex B
regions is greater than their share of emissions: the aggregate OECD+EET reduction is 9%, while
the FSU reduction is 13% and the non-Annex B reduction is 18%.
Within the Kyoto-constrained regions, the reduction in per capita emissions varies considerably
depending on the extent to which the region imports permits. At one extreme is Japan, where per
capita emissions would be less by only 2.7% because it imports 92% of its emission reduction
obligation. The greater percentage reductions in the other constrained regions reflect their lesser
dependence on permit imports: EEC, –6.7%; USA, –9.8%; OOE, –12.6%; and EET, –13.0%.
Finally, as shown in Fig. 7, neither the Kyoto commitments nor the scope of trading do much to
change the ratio of emissions per capita between the industrialized and developing economies of the
world.
Table 2. Per Capita Emissions in the Reference Case and in the Three Basic Trading Cases
USA JPN EEC OOE EET
OECD
+ EET FSU
Non-
An. B World
Population in 2010 (million) 277.2 125.0 341.9 135.8 128.5 1008.3 324.5 5585.7 6918.5
Reference (tonC/cap) 6.63 3.39 3.11 3.48 3.07 4.16 2.35 0.74 1.32
No Trading (tonC/cap) 4.57 2.24 2.21 2.21 2.15 2.86 2.35 0.74 1.13
Annex B Trading (tonC/cap) 4.95 3.00 2.52 2.53 2.11 3.20 1.63 0.74 1.14
World Trading (tonC/cap) 5.98 3.30 2.90 3.04 2.67 2.78 2.04 0.61 1.14
Details for Non-Annex B Regions EEX CHN IND DAE BRA ROW
Population in 2010 (million) 1103.8 1376.9 1132.4 236.8 199.9 1535.8
Reference (tonC/cap) 0.84 1.30 0.43 1.30 0.49 0.35
World Trading (tonC/cap) 0.79 0.98 0.34 1.13 0.47 0.29
0
1
2
3
4
5
6
7
USA OECD+EET FSU Non Annex B World
Metric Ton Carbon
Reference
No Trading
Annex B Trading
Full Global Trading
Figure 7. Per Capita Carbon Emissions.
10
3. IMPORT LIMITATIONS
The three illustrative cases presented above are based on several assumptions:
· Potential participants in emissions trading are not impeded by restrictions on trading,
· All parties participate to the extent warranted by the economics,
· Trading is conducted efficiently with low or non-existent transactions costs, and
· There is no monopolistic behavior.
Such assumptions simplify exposition and the analysis of emissions trading, but they are not
necessarily realistic. One of the possible departures from this theoretical ideal is a limit on the
extent to which an Annex B party can rely on emission permits to reduce what otherwise would be
its domestic abatement requirement. The “supplementarity” provisions of the Kyoto Protocol
suggest such a limit, although no specific number has been agreed upon. More recently, the EU
environmental ministers have called for a “concrete ceiling” on permit imports.
To illustrate the implications of such a restriction, we consider limits of 75%, 50% and 25% on
any Annex B party’s ability to meet its emission reduction requirement through imported permits.6
From the full global trading case without restrictions, we know that Japan would optimally realize
92% of its Kyoto commitment through imports, so that with a 75% limit, it would have to abate
more domestically. The EEC would also be affected, but to a very slight extent since it would
otherwise import 76% of its emission reduction requirement; but none of the other importing
regions would be affected. With a 50% limit, all regions would be limited and forced to abate more
domestically at higher cost; and at a 25% limit, the reliance on higher cost domestic abatement
would be even greater.
Figure 8 shows how the demand curve is shifted inward by such limitations, and Table 3
summarizes the effects on prices (in 1985 US$), quantities and costs. The “No Limit” case is the
same as full global trading, and it is provided for comparison.
The effect of import limits upon the exporting regions is predictable. With less demand, the market
price falls, fewer “rights to emit” are produced and exported, and there is a drop in the gains to
exporters. The effects on importers are twofold. Importers that are not affected by the limitation
import more, and at a cheaper price; thus they realize more savings. They are better off because the
limitation removes some of the demand by higher cost abaters from the market. Importers who are
affected by the limitation also benefit from this lower market price on their imports, but they also
incur higher domestic abatement cost.7 For instance, with the 75% limit, the net balance between
these two opposing effects is positive for the EEC (+1.14% gains) but negative for Japan (-1.94%).
6 The Kyoto Protocol specifies only that “trading shall be supplemental to domestic actions.” We define this
potential limitation as a percentage relative to the emission reduction implied by the Kyoto commitment without
trading, given EPPA’s prediction of reference emissions.
7 Consumers will not receive the benefit of cheaper imports since the discrepancy between the internal marginal
abatement cost and the world market price creates a rent for the allowed imports that will be collected somehow,
perhaps through a government auction of the rights to import permits. Since this sum is a internal transfer, we do
not count it as a resource cost. We are indebted to Ken Chomitz of the World Bank for pointing out this feature of
our analysis.
11
$0
$20
$40
$60
$80
$100
$120
$140
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
Annex I
Trading
Supply World
Trading
Demand
Kyoto Cap
Figure 8. World Supply and Demand in 2010 under Kyoto Constraints. Limitations on Demand:
75%, 50%, and 25%. (Tables D, E, F)
Table 3. Effects of Import Limits on Global Emissions Trading
No Limit 75% Limit 50% Limit 25% Limit
Market Price (1985 US$/tonC) $24 $23 $13 $3
Quantity Traded (Mton C) 935 913 656 328
FSU (Mton) 211 209 183 148
Non-Annex B (Mton) 723 704 473 180
World Cost (billion 1985 US$) $11.2 $11.9 $21.7 $55.3
OECD+EET Cost $25.6 $25.4 $27.1 $56.1
FSU Gain $4.2 $4.0 $2.0 $0.5
Non-Annex B Gain $10.2 $9.5 $3.4 $0.3
The overall effect of the 75% limit is relatively slight: the world cost increases slightly (6.5%),
the quantity traded is 2% less, the price falls by 4.1%, and the cost to the Kyoto-constrained
regions is reduced slightly. With a 50% or 25% limit on imported permits, all the importing
regions are restricted, and the price of imports is much lower, $13 and $3, respectively. Among
the importing regions, the effects of this tighter limit depend upon the balance between higher
domestic abatement costs and cheaper import costs. At 50%, this balance is now negative for both
EEC and Japan, but the benefit of the much cheaper imports continues to outweigh the higher
domestic abatement costs for the other three importing regions. With a 25% limit, all the importing
regions are worse off than they would be without any limit on imports, and the percentage
increases in cost are greatest for the higher cost producers of abatement among the importing
regions (JPN, +425%; EEC, +123%; OOE, +73%; USA, +58%; EET, +5%).
From the standpoint of the suppliers, the effect of a limitation on imports is to skew the
distribution of gains from trading even more heavily in favor of the importing regions. It can be
seen in Table 2 that, as the limit becomes more stringent, greater domestic abatement by the
importing regions causes world costs to rise, but at least up to the 50% limit, the total cost for the
importing regions remains relatively constant, at $25–27 billion. In contrast, for the exporting
regions, the gains from emissions trading diminish markedly. The global efficiency losses due to
12
the import limit are effectively shifted to the exporting regions through the lower price of imported
permits. Only when the limit becomes very tight and the price of permits is very low, for instance
within 25% limit, do the increases in domestic abatement costs outweigh the benefits of cheaper
imports, and the importing regions start to absorb the efficiency losses.
The effect of a quantitative limit on imports can be summarized quickly. To the extent that it is
binding, it redistributes the gains from trading among the importing regions from those facing the
highest abatement costs to those facing the lowest costs. Furthermore, and at least initially, it shifts
the increase in global cost caused by a binding import limit onto the suppliers.
4. CDM “SURCHARGES” AND CARTELIZATION OF SUPPLY
Departures from the theoretical ideal can also arise on the supply side. The Kyoto Protocol
provides for a Clean Development Mechanism (CDM) by which non-Annex B emissions
reductions would be certified and made available as emission permits for Annex B countries. The
exact role of the CDM has yet to be defined, but the Protocol does provide that the CDM would
apply a surcharge to cover its administrative expense and to collect funds to assist countries “to
meet the cost of adaptation” (Article 12.8). Also, because of the inelasticity of demand at low
market prices, there is a possibility that suppliers could increase their gains significantly by
colluding to limit supply, instead of competing among themselves.
4.1 CDM Surcharges
CDM surcharges would create a wedge between the price paid by consumers and that received
by producers, as illustrated in Figure 9 for surcharges of 25%, 50% and 100% of the marginal
cost of supply. Table 4 provides details concerning prices, quantities and gains. Surcharges of
50% or 100% are beyond any level being discussed currently, but they do illustrate the effects of
inelastic demand. Since FSU exports would not be surcharged, we treat the FSU as a competitive
supplier in all these cases.
The most notable feature of Table 4 is that CDM net profit, defined as revenue minus abatement
cost, increases as the surcharge is raised even though importers reduce demand in response to the
higher prices. This phenomenon reflects the price inelasticity of demand over this portion of the
aggregate demand curve. As would be true of any tax, there is a welfare loss, equal to the increase
in world cost as a result of the more expensive abatement undertaken by importers.
The second notable feature of Table 4 is that producer profit decreases on the assumption that
surcharge revenue goes to the CDM. Of course, the distribution of the proceeds raised by the
surcharge would be a matter for the producers to decide. With inelastic demand, it would be
theoretically possible to devise distributions that would keep producers whole and still make funds
available for other purposes such as adaptation. Nevertheless, any redistribution of funds for such
purposes will reduce what the non-Annex B producers might otherwise receive.
13
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
0 200 400 600 800 1,000 1,200
Quantity (Mton)
Allowance price
Supply from
Non-Annex B
through CDM
Demand to
Non-Annex B
Kyoto Cap
25%
50%
100%
Figure 9. CDM Surcharges: 25%, 50% and 100%. (Tables G, H, I)
Table 4. Prices, Flows and Gains with a CDM Surcharge
Level of CDM Surcharge None 25% 50% 100%
Market Price (1985 US$) $23.8 $27.4 $30.6 $35.9
Producers Marginal Cost (‘85$) $23.8 $22.0 $20.4 $17.9
CDM Net profit (billion $) $10.2 $12.6 $14.4 $17.0
Profit to producers $10.2 $8.9 $7.9 $6.3
Surcharge Proceeds $0 $3.7 $6.6 $10.7
CDM Exports (MtonC) 723 687 654 602
FSU Exports (MtonC) 211 219 225 235
FSU Gains (billion $) $4.2 $5.0 $5.7 $6.9
OECD+EET Cost (billion $) $25.6 $28.9 $31.7 $36.3
World Cost (billion $) $11.2 $15.0 $18.2 $23.0
The implicit conflict between producer interests and re-distributive goals has larger implications
for the evolution of the global climate regime. It will be readily evident to all non-Annex B
producers that the greatest beneficiary from CDM surcharges is the FSU. As a competitive
supplier, the FSU benefits directly from the increase of the market price and the increase of its
exports. It is able to benefit doubly because, having accepted an Annex B limit on emissions, its
exports are not surcharged. The example will be compelling for many non-Annex B producers,
who will come to see Annex B accession as a way to by-pass the CDM. Proponents of the CDM
will not be pleased, but such action is essential both to the creation of a more efficient global
trading system and to achieving the stabilization of atmospheric concentrations of GHGs.8
8 See Yang and Jacoby (1997) and Jacoby, Prinn and Schmalensee (1998).
14
Accession logically implies a transitional role for the CDM. So long as the CDM provides an
essential service—recordation, certification and verification—for converting non-Annex B
emission reductions into tradable emission permits, a reasonable fee can be charged. But that
service, and the attendant role for the CDM, would no longer be needed as non-Annex B parties
accept limits and arrange for their own certification and verification as part of the global emissions
trading regime.
4.2 Cartelization of Supply
The ability to raise surcharges without diminishing net profit to non-Annex B producers may
inspire thoughts of a cartel, not so much because of the CDM, which might serve as a coordinating
mechanism, but because of the inelasticity of demand that characterizes the global emissions
market.9 This potential is explored in Table 5, which compares the effects, under full global
trading, for a fully competitive market and two alternative assumptions about non-competitive
behavior:
1) A CDM cartel in which the FSU is a competitive supplier, and
2) A full supplier monopoly in which the FSU and the non-Annex B countries cooperate
through the CDM or an alternative mechanism.
In calculating the gains for the FSU and the non-Annex B regions, we assume that the monopoly
rent, the difference between market price and marginal cost, is shared in proportion to the quantity
of abatement provided at marginal cost. In doing so, we also assume a highly efficient cartel in
which only the lowest cost sources of permits are produced (including the FSU’s hot air).
Successful monopolization has the expected effects: the market price is higher, as is world
resource cost, and the gains from trade are shifted substantially to the suppliers. In the case of the
CDM cartel for example, the importing regions lose $32 billion: the $9 billion increase in global
costs plus a $23 billion transfer of income to the suppliers. With the full supply monopoly, the
importing regions lose another $25 billion, $12 billion in increased resource cost and another
$13 billion transfer to the suppliers. Even though this is a dramatic change in the distribution of the
gains from permit trade, the Kyoto-constrained regions are still better off (by $7 billion) than if
there were no supply at all from the non-Annex B regions. The FSU is, however, always worse
off, even when the suppliers successfully create an efficient monopoly.
Table 5. Effect of Non-Competitive Behavior on Gains from Trade, Costs and Prices (Tables J to L)
Competitive case Non-Annex B cartel Non-Annex B + FSU monopoly
Market Price ($/metric ton C) $23.8 $62.7 $108.2
World Cost (billion 1985US$) $11.2 $20.0 $32.2
Non-Annex B Gains (billion $) $10.2 $22.4 $30.1
FSU Gains (billion $) $4.2 $13.8 $17.4
OECD+EET Gains (billion $) $94.2 $63.6 $39.2
9 In contrast, there is little potential for non-competitive behavior in the Annex B case because of the higher price
and more price elastic demand, as discussed in Ellerman and Decaux (1998).
15
Table 6. Effect of Monopoly on Gains for Suppliers when Limit on Permit Imports (Tables J to L)
Limit on
imports
Competitive
case
Non-Annex B +
FSU monopoly
Market Price ($/metric ton C) No limit $23.8 $108.2
50% limit $12.5 $103.4
World Cost (billion 1985US$) No limit $11.2 $32.2
50% limit $21.7 $37.6
Non-Annex B Gains (billion $) No limit $10.2 $30.1
50% limit $3.4 $26.2
FSU Gains (billion $) No limit $4.2 $17.4
50% limit $2.0 $16.3
OECD + EET Savings (billion $) No limit $94.2 $39.2
50% limit $92.6 $39.8
The incentive to collude would be even greater if limits were placed simultaneously on import
demands, since the effect of such limits is to make demand more inelastic. Table 6 makes the
point. It shows the effect of the full monopoly on price, world cost and gains when there is no
limit on permit imports and when a 50% limit is set.
The effect of successful monopoly is much the same whether or not there are import limits. The
market price rises to about the same level, $103 vs. $108, world cost increases, and the exporting
regions gain significantly at the expense of the importing regions. The effect of a 50% import limit
is also much the same whether a competitive market or a monopoly is assumed. The market price is
reduced, world cost increases, and producer gains are diminished, but by less when there is a
monopoly.
5. INEFFICIENT SUPPLY
Full global trading is an appealing prospect, to importers for the great reductions in cost and to
exporters for the possibilities of non-competitive pricing, but both importers and exporters should
remember that the potential trading gains shown by CGE models assume complete economic
rationality and negligible transactions cost.10 The more likely contour of global emissions trading is
that this potential will not spring forth full blown once trading is allowed, but that it will develop
only slowly as experience is gained. Figure 10 depicts several possibilities for less than fully
efficient supply in which it is assumed that 5%, 10%, 15%, 25%, and 50% of the supplies from
the FSU and non-Annex B regions are available at every price.11 The lowest line, corresponding to
100%, is fully efficient global trading.
10 EPPA 2.6 is not alone in making such forecasts. The recent analysis provided by the U.S. Council of Economic
Advisors to support Chairman Janet Yellen’s earlier testimony, USG/EOB (1998), obtains a similarly low permit
price for a comparable market.
11 Expansion in the scope of trading would occur in periods after 2010, when permit demands and supplies might
vary depending on growth and subsequent climate agreements. This illustration, using a static 2010 picture, shows
the nature and approximate magnitude of the changes over time.
16
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance Price
15%
10%
5%
Supply
Supply = 50%
of Total
Demand
Kyoto Cap
Supply = 25%
of Total
Figure 10. World Permit Supply and Demand in 2010 under Kyoto Constraints. Limitation on
Supply: Suppy = 50%, 25%, 15%, 10%, and 5% of Total. (Tables M to Y)
Inefficient supply could result from several causes. The most serious and most likely is the
influence of transaction cost, particularly that involved in meeting the “additionality” criterion. Past
experience with credit-based emissions trading systems applied to other environmental problems
and with Joint Implementation pilot projects has shown these costs to be large and the quantities
traded to be small.12 Alternatively, a general failure to take full advantage of economic
opportunities presented by emissions trading would also limit the amount of credits available from
the non-Annex B regions and the FSU. Finally, some non-Annex B countries have expressed
considerable antipathy to emissions trading as a concept; and they may decide not to participate in
an emissions trading regime, whether through the CDM or otherwise, for political reasons. It is not
possible to assess beforehand to what extent these causes might operate in a global market, but
they will certainly be present.
If the supplies from the global market are very small initially, say 5% of the full global
potential, then the market price for permits would be relatively high ($181) and the quantities
traded small (170 Mton). As experience is gained and supplies become more ample, the quantities
traded would increase and prices fall. The gains from emissions trading increase with improved
efficiency of supply and they become quite large well before attaining 100% efficiency. As shown
in Figure 11, total gains increase steadily, but those for exporters increase only up to a point a little
above15%. Thereafter, the relatively inelastic demand causes the gains to exporters to decline,
while those to the importers increase dramatically.
12 See UNCTAD (1998) for a discussion of the relative efficiency of allowance and credit based trading systems.
These costs will be greatly reduced to the extent that non-Annex B regions accept emission caps that remove the
concern about additionality and the necessity to establish a counterfactual baseline. Curiously, the Kyoto Protocol
also asserts “additionality” as a criterion for joint implementation projects within Annex B countries (cf. Art. 6).
17
0
20
40
60
80
100
120
5% 10% 15% 25% 50% 100%
Percent of Full Potential
Billion 85$US
Importers
Exporters
Figure 11. Gains from More Efficient Global Trading. (Tables M to Y)
When supply is very inefficient, the market distortions considered earlier have little effect. For
example, as severe a limitation on demand as a 25% ceiling would affect only Japan if supplies
from the FSU and non-Annex B regions were only 5% of the full potential. And at the prices
reflecting very inefficient supply, there would be no gain to monopoly. Nevertheless, as supply
becomes more efficient and prices decrease, a limitation on imports would become more binding;
and as the market clearing price moved into the inelastic range (below about $110), noncompetitive
pricing could become more of a concern.
With inefficient supply, the effect of CDM surcharges will also depend on the elasticity of
demand. In the inelastic range (low price, large quantity), corresponding to greater supply from the
non-Annex B regions, the surcharge can result in greater gains for exporters, so that it is at least
possible to keep producers whole (compared to no surcharge) and generate funds for other
purposes. However, in the inelastic range (high price, small quantity), any surcharge will reduce
the total gain to be shared between producers and other claimants.
As would be expected, inefficient supply implies a higher market price, greater world cost and
fewer gains from trade, but the gains will still be substantial and decidedly worth pursuing. The
effects of distortions, such as import limitations and non-competitive pricing, are the same as with
fully efficient supply, but the magnitude of the effect is less because there is less to lose. Perhaps
the most notable feature of inefficient supply is that the gains to early entrants in the global
emissions market will be very large. Thereafter, as is true for any innovator, the large initial reward
will dissipate as imitators follow.
6. INTERNATIONAL TRADE IN ENERGY AND NON-ENERGY GOODS
MACs provide a simple and direct way to study emissions trading, but they do not indicate the
effect of abatement actions on the prices and quantities of goods in international trade. The effects
of emissions reductions may not be restricted to the countries undertaking the abatement actions.
Through trade they may be transmitted to countries that made no commitment. In this section, we
depart from the use of MACs and examine these other effects using the EPPA results directly.
18
The central feature driving these trade-in-goods effects is the shadow price for carbon that is
faced by the Kyoto-constrained regions, and the effect of that shadow price on the world price for
oil and natural gas. Table 7 provides a quick summary of those prices for the 2010 reference case
and our three basic emissions trading scenarios. Carbon prices are shown in 1985 dollars; oil and
gas prices are shown as an index with the 2010 price in the reference case set to 1.0.
Table 7. Carbon And Energy Prices In 2010 For Kyoto-Constrained Regions
Reference No Trading Annex B Global
Carbon Price $0 $116–584 $127 $24
Oil Price 1.0 0.90 0.95 0.99
Natural Gas Price 1.0 0.83 0.86 0.96
Oil and natural gas are treated as Hecksher-Ohlin goods in EPPA, which means that there is
complete freedom of trade among regions and a single world price. As a result, restrictions on
carbon emissions in Annex B countries lead to lower oil and natural gas prices for producers and
consumers throughout the world. In contrast, coal is an Armington good, which means that there
is no single world price but a series of regional prices that can be affected by changes in trade
flows. Consequently, actions by the Annex B regions will affect coal prices in these regions, but
generally not elsewhere, or only through the quantities traded (which are not great.)
As the scope of emissions trading expands and the price of carbon declines, the effect of Kyoto
commitments on energy prices diminishes. This effect occurs because one of the cheapest forms of
carbon abatement is the reduction of and substitution away from the use of coal. Emissions trading
makes it possible to substitute reduced coal use in non-Annex B regions for more expensive
abatement that reduces oil and natural gas use in Annex B regions.
The effects on trade patterns of the Kyoto commitments and emissions trading are most
usefully observed by comparing the no trading case with full global trading. The former can be
viewed as a relatively inefficient way of achieving the goals set at Kyoto, while the latter represents
the most efficient way. Emissions trade limited to Annex B is an intermediate case, which we omit
because its effects lie between what occurs with no emission trading and with full global trading. 13
6.1 Trade in Goods with No Emissions Trading
The starting point for the no emissions trading case is the effect of the carbon price on domestic
demand in the Kyoto-constrained regions. Table 8 provides the percentage change from the
reference prediction for domestic use of sectoral output (production less exports plus imports) by
each Kyoto-constrained region. The sectoral breakdown in EPPA includes five energy sectors (oil,
gas, coal, electricity and refined oil) and three non-energy sectors (agriculture, energy intensive
industries, and other industries).
13 The FSU is the one exception. With Annex B trading, its demand for energy declines in the same manner as the
Kyoto-constrained Annex B regions, as does its production and export of energy-intensive goods.
19
Table 8. Percent Change in Domestic Use by Sector and Region Due to
Kyoto Commitment Without Emissions Trading
USA JPN EEC OOE EET
Oil –3.5% –19.6% –4.0% –7.6% –3.4%
Gas –11.1% –24.8% –10.3% –14.1% –12.1%
Coal –54.5% –48.8% –52.1% –63.2% –49.4%
Electricity –11.1% –11.3% –12.2% –13.1% –19.7%
Refined Oil –6.5% –20.3% –7.7% –10.6% –7.7%
Agriculture –0.7% –2.2% –0.2% –0.9% –0.4%
Energy Intensive –0.5% –5.1% –2.6% –1.7% –2.2%
Other Industries +0.1% –1.1% –0.2% –0.4% –0.6%
With one insignificant exception, all the signs are negative, and they are greatest in magnitude
for the energy sectors. Coal is hit hardest with domestic use declining by about half in all regions.
However, coal, like electricity and refined oil, is mostly a domestic good so that the international
trade effect of this reduction in demand is not particularly great. Oil and gas are more heavily traded
internationally, and the effect of the reduction in Annex B demand is a world-wide fall in the price
of oil and gas: by 10% and 17%, respectively, as was shown above in Table 6.14 This reduction
in price reduces the income of oil and gas producers throughout the world; and the effect will be
particularly large on the two oil and gas exporting regions, the EEX and the FSU. Interestingly,
the quantities of oil and gas traded internationally do not change much, but there is a shift in the
destination of energy exports away from the Kyoto-constrained regions towards the nonconstrained
regions, as illustrated next, through trade in energy-intensive goods.
The domestic use of energy-intensive goods declines in all Kyoto-constrained regions;
however, the most significant effects show up in the trade balances and domestic output for these
goods, as shown in Table 9. The patterns are very clear. The Kyoto-constrained regions reduce
production and net exports of energy-intensive goods, while the non-constrained regions increase
output and net exports of them. The Kyoto-constrained regions increase imports of these goods,
and of the non-taxed carbon that is embodied in them.
Table 9. Changes in Export, Import and Output of Energy Intensive Goods: No Emissions Trading
Absolute
Change in: USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
Net trade –2.57 –30.96 –26.20 –6.29 –1.61 +7.93 +22.8 +6.78 +1.13 +6.07 +1.86 +21.1
Output –6.90 –61.68 –42.25 –9.31 –4.99 +9.81 +21.1 +15.3 +2.74 +15.8 +3.46 +22.9
14 The greater effect upon natural gas results from the greater responsiveness to price changes in the industrial and
residential sectors, where natural gas is mostly used, than in the transportation sector, where petroleum products
dominate. Both oil and natural gas gain share in electricity generation at the expense of coal, but electricity demand
also shrinks. In the end, the balance between the losses in non-electricity sectors and the gains in electricity
generation are less favorable for natural gas than for oil.
20
6.2 Comparing the No-Trading Case with Full Global Trading
Meeting the Kyoto commitments with full global trading has much less effect on Annex B
demand for oil and gas and on the trade in energy-intensive goods than was the case with no
emissions trading, as shown in Table 10 and Table 11.
The effects of the Kyoto Protocol remain negative, but the magnitudes are much attenuated.
Coal use is reduced by at most a quarter; and the effect on other goods is generally less than 1%.
The world prices for oil and natural gas are reduced by only 1.3% and 3.5%, respectively, instead
of 10% and 17% in the no trading case.
The changes in trade and output of energy-intensive goods are all relatively small; and there is
no consistent pattern as in Table 9, because the price of carbon is the same in all countries. Output
and the net trade position is most adversely affected in China, India and FSU because their
production of energy intensive goods is more dependent on coal, which is the fuel most strongly
affected by any positive price on carbon emissions.
Table 10. Percent Change In Domestic Use By Sector And Region Due
to Kyoto Commitment With Full Global Trading
USA JPN EEC OOE EET
Oil –0.2% –0.2% –0.2% –0.3% –0.5%
Gas –0.5% –0.5% –0.7% –0.04% –0.9%
Coal –21.5% –5.0% –13.2% –25.0% –15.4%
Electricity –2.5% –0.3% –1.6% –2.3% –5.0%
Refined Oil –1.0% –0.8% –0.6% –1.2% –1.5%
Agriculture –0.1% –0.1% –0.03% –0.1% +0.2%
Energy Intensive –0.1% –0.1% –0.1% –0.1% +0.02%
Other Industries –0.1% –0.1% –0.1% –0.1% –0.1%
Table 11. Changes In Export, Import And Output Of Energy Intensive Goods: Full Global Trading
Absolute
Change in: USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
Net trade +0.37 +0.30 –0.09 +0.16 +0.19 –0.71 +1.61 –2.60 –0.94 +0.53 –0.02 +1.22
Output –0.59 –0.18 –0.93 –0.02 +0.21 –1.81 +0.45 –8.90 –2.25 +0.10 –0.01 +1.24
6.3 Summary
The effects of the Kyoto Protocol and of emissions trading on non-Annex B regions consist of
three analytically separate elements, which can be summarized by the simple matrix in Table 12.
Table 12. Effect of Kyoto and Emissions Trading
KYOTO EFFECT No Emissions Trading Global Emissions Trading
Permit Revenues 0 +
Oil & Gas Export Revenue – – –
Energy Intensive Goods Trade + 0
21
Whether there is emissions trading or not, the effect of the Kyoto commitments on non-Annex B
countries is mixed. Without emissions trading, there will be no permit exports, but an increase in
the production and export of energy intensive goods can be expected, assuming no protective trade
measures are enacted by the Kyoto-constrained regions. With global emissions trading, there will
be permit export revenues, but no significant increase in production and exports of energy
intensive goods. The revenues of non-Annex B regions that export oil and gas will be adversely
affected in either case, but much less so with the lower carbon price associated with a broadened
market for emissions permits. In effect, oil and gas exporters benefit as emissions trading makes it
possible for Kyoto-constrained regions to substitute reduced coal use in non-Annex B regions for
reduced oil and natural gas use at home.
7. CONCLUDING OBSERVATIONS
The effect on developing countries of Annex B actions to comply with the Kyoto Protocol will
depend on the particular country and on the success of emissions trading. All developing economies
will have an interest in emissions trading as a source of new export earnings, but their interest will
extend beyond this new commercial possibility. In particular, oil and gas exporters will have a
strong interest in emissions trading as a means to reduce the cost for Annex B parties generally, and
specifically to allow Annex B parties to substitute reduced coal emissions abroad for reduced oil and
gas emissions at home. It is possible that some countries and sectors would be adversely affected by
emissions trading. For instance, the advantage enjoyed by producers of energy-intensive goods will
be greater with no emissions trading, assuming that importing embodied carbon is permitted by the
Annex B regions. The net balance will be different for various countries, but in general it seems
likely that developing countries will benefit from emissions trading.
The gains from emissions trading are potentially very large, fully sufficient to give potential
buyers and sellers an economic incentive to support such a system. Most studies of permit trade
suggest ample supplies would be offered by non-Annex B regions, at commensurately low prices,
yielding large cost reductions for the Kyoto-constrained regions and substantial benefits to non-
Annex B regions. The actual supply is likely to be somewhat less, at least initially, due to
transactions cost and less than complete participation in the market by non-Annex B regions.
Nevertheless, whatever the initial extent of the market and its subsequent development, both
importing and exporting parties will gain.
As in any market, the potential for welfare-damaging distortions is always present. Given the
undefined meaning of “supplemental” in the Kyoto Protocol, a particularly alarming distortion
from the developing country standpoint is a limitation on Annex B imports of emission permits.
Not only will such limits depress permit prices and the export earnings of non-Annex B parties,
but they will have perverse effects on importing countries. Annex B parties with relatively high
domestic abatement costs, and thus higher imports, would be penalized, while those with relatively
low domestic abatement costs, and fewer imports, would find the cost of meeting their Kyoto
commitments reduced.
22
The ability of the CDM to impose surcharges to help countries meet the costs of adaptation will
depend upon the elasticity of demand, which depends in turn on the supply available from non-
Annex B regions. The greater the supply and the lower the price, the greater the ability to impose
surcharges without fear of losing revenue. Still, there is an unavoidable conflict between the
interests of the producers of the permits and redistributive goals, since whatever is redistributed
could as well be kept by the producers.
The FSU and the non-Annex B countries appear as clear rivals to each other in the stylized
cases we have presented, but casting this rivalry in geopolitical terms obscures a more practical
aspect. Neither the Annex B nor the global market will spring into life full blown as soon as the
appropriate institutional arrangements are made; instead these markets will develop slowly over
time. The stylized Annex B market should be thought of as illustrating the potential gains for first
entrants of whatever provenance into a new and expanding market. Those gains will inevitably be
dissipated as others follow, so that the conflict, which appears here as one between the FSU and
non-Annex B regions, is really one between the early entrants and later followers.
The FSU does however have one large advantage. Assuming effective accounting and
enforcement, its acceptance of an Annex B emission limitation removes the high costs of
establishing additionality, which will be required of projects in non-Annex B countries. This
example will encourage the most enterprising non-Annex B countries to accede to Annex B to
capture more of the large gains of early emissions trading. In doing so, these parties will foster
more efficient emissions trading and promote the ultimate goals of the Kyoto Protocol, but they
will also necessarily reduce the ability of the CDM to act as a re-distributive mechanism.
8. ACKNOWLEGMENTS
Funding for this paper from the World Bank is gratefully acknowledged. We are also very much
indebted to Ian Sue Wing for modeling support and to the following individuals for comment on
earlier versions of the paper: at MIT, Richard Eckaus, David Reiner and Mustafa Babiker; and at
the World Bank, Zmarak Shalizi, Ken Chomitz and Maureen Cropper.
9. REFERENCES
Ellerman, A.D. and A. Decaux, 1998, Analysis of Post-Kyoto Emissions Trading Using Marginal
Abatement Curves, MIT Joint Program on the Science and Policy of Global Change Report
No. 40, October, Cambridge, MA.
Jacoby, H.D., R.G. Prinn and R. Schmalensee, 1998, Kyoto’s Unfinished Business, Foreign
Affairs, 77(4):54-66, July/August.
Prinn, R.G., et al., 1998, Integrated Global System Model: Feedbacks and Sensitivity Studies,
Climatic Change, forthcoming; MIT Joint Program on the Science and Policy of Global
Change Report No. 36, May, Cambridge, MA.
United Nations Conference on Trade and Development (UNCTAD), 1998, Greenhouse Gas
Emissions Trading: Defining the Principles, Modalities, Rules and Guidelines for Verification,
Reporting and Accountability, Geneva, Switzerland, draft of July.
23
United Nations Framework Convention on Climate Change, 1997, Kyoto Protocol.
United States Government, Executive Office of the President, 1998, The Kyoto Protocol and the
President’s Policies to Address Climate Change: Administration Economic Analysis, July.
Yang, Z., et al., 1996, The MIT Emissions Prediction and Policy Analysis (EPPA) Model, MIT
Joint Program on the Science and Policy of Global Change Report No. 6, Cambridge, MA.
Yang, Z. and H.D. Jacoby, 1997, Necessary Conditions for Stabilization Agreements, MIT Joint
Program on the Science and Policy of Global Change Report No. 26, Cambridge, MA.
25
APPENDIX A: MARGINAL ABATEMENT CURVES15
A.1 What are Marginal Abatement Curves and What Do They Represent?
A CGE model will produce a shadow price for any constraint on carbon emissions for a given
region R at time T. An example would be a 10% reduction below the reference case for USA in
2010. This price indicates the marginal cost of reducing the last ton of carbon required to meet the
constraint. As might be expected in a proper CGE model, the shadow prices corresponding to
constraints of increasing severity rise as an increasing
function of emissions reduction. A Marginal Abatement
Curve is described by generating the plots of the shadow
prices corresponding to constraints of increasing severity
at time T, then drawing a line joining the plots, as in
Figure A1. Each plot on the curve for region R at time T
represents the marginal cost (p) of abating an additional
unit of carbon emissions at quantity q. The integral
under the curve (hatched area) represents the total
abatement cost associated with each level of abatement,
that is, the resources re-allocated to abatement because of
the constraint.
Region R, Time T
Shadow price of carbon
q
MAC
p
CO2 abated
plot
= Total cost of abatement
under constraint: q abated
Figure 1. Marginal Abatement Curves
A.2 How Can MACs Be Used for Trade Studies?
If several regions commit to achieve emission
reductions at the same time and there is some
prediction of what emissions would be without the
commitment, the abatement required can be
represented as a point on each region’s marginal
abatement curve.17 Moreover, if the marginal costs
associated with those reductions are different across
regions, the aggregate cost of meeting the
commitments will be less to the extent that a region
with higher marginal costs can induce a region with
lower marginal costs to abate more on its behalf.
Figure A2 illustrates the gains from trading for two
regions, R1 and R2, subject to the constraints: CO2
abated = q1 for R1 and q2 for R2.
R1 Time T
I1 I2
R2
A
A'
B'
B
Q' Q1 Q2
Shadow price of carbon
q' q1 q2 q'
p'
0
p2
p1
CO2 abated
2
Q'2
1
1
Figure A2. Marginal Abatement Curves
Used for Trade Studies.
15 This appendix draws heavily on Ellerman and Decaux, 1998.
17 As is typically assumed in such analyses, and as is the case here, the environmental goal pursued—reducing
atmospheric concentration of a long-lived, well-mixed greenhouse gas like CO2 is not affected by the location of
the emission reduction.
26
By abating more, the lower cost region produces “rights to emit,” or emission permits, which it
can sell to the higher cost region which would thereby avoid a like amount of higher cost domestic
abatement. Thus, the difference in the marginal costs associated with each region’s commitment in
the absence of trade creates a potential gain to be shared in some manner between them. The
aggregate emission reduction will be achieved at least cost when the two regions trade until their
marginal abatement costs are equal at what will then be the market clearing price for the “right to
emit” carbon.
Table A1 displays the cost calculations in the no trading and trading cases. These cost
calculations can easily be generalized to N regions, and they constitute the basis for emissions
trading studies using MACs.
Table A1. Basics of Trade Studies
No Trade Trade between R1 and R2
Constraints R1: q1 abated
R2: q2 abated
R1 and R2: q1 + q2 abated
Marginal Cost / Market Price R1: p1
R2: p2
R1 and R2: p' such that p'1(q'1) = p'2(q'2) = p'
and q'1 + q'2 = q1 + q2
Abatement Cost R1: area AOQ1
R2: area BOQ2
R1: area (A'OQ'1)
R2: area (B'OQ'2)
Emission Permits Trading NA R1: buys right to emit q1 – q'1
R2: sells right to emit q'2 – q2 = q1 – q'1
Imports (+) / Exports (–) Flows NA R1: pays p' ´ (q1 – q'1) = area (A'I1Q1Q'1) to R2
R2: receives p' ´ (q'2 – q2) = area (B'I2Q2Q'2) from R1
Total Cost R1: area AOQ1
R2: area BOQ2
R1: area (A'OQ'1) + area (A'I1Q1Q'1) < area (AOQ1)
R2: area (B'OQ'2) – area (B'I2Q2Q'2) < area (BOQ2)
Savings from Trading NA R1: area (AI1A') (hatched)
R2: area (BI2B´) (hatched)
A.3 How are MACs Generated from CGE Models?
The CGE model we use to generate MACs is the MIT Emissions Prediction and Policy Assessment
(EEPA) model. It is a multi-sectoral, multi-regional global model of economic activity, energy use
and greenhouse gas (GHG) emissions that is part of MIT’s larger Integrated Global Systems
Model (IGSM).17 As such, EPPA is frequently used to predict emissions and to assess the costs
associated with constraints on carbon emissions. Although EPPA predicts emissions and assesses
costs through the year 2100, this study takes the year 2010 as representative of the first
commitment period, which includes the years 2008 through 2012. The model keeps track of five
vintages of capital. Version 2.6 of the model incorporates two backstop technologies; however,
because these energy sources will not play a substantial role in 2010, they are omitted from the
calculations presented here.
17 See Yang et al. (1996) for a description of EPPA, and Prinn et al. (1998) for a description of the IGSM.
27
To build the MACs, we run the EPPA model under different constraints corresponding to
different levels of carbon abatement, such as 10%, 20%, or 30% of reference emissions in the year
2010. For each set of constraints, the corresponding, regional shadow prices of carbon are an
output of the model (in 1985 US$).18 The shadow prices for each region can then be plotted as a
function of the level of abatement, and a line can be fitted to the plots to get the MAC for that
region and time.
As an example, Figure A3 shows the results obtained for the four OECD regions in 2010
when the policies applied are: proportional reductions by all OECD regions (1, 5, 10, 15, 20, 30
and 40% of reference 2010 emissions), and no reduction by other regions. Here, the shadow
prices have been plotted as a function of the percentage of carbon emission reduction (and not the
absolute quantities), in order to normalize for the size of the regions and to show the variation in
relative cost across regions. For any equal percentage reduction among the OECD regions, the
abatement of the corresponding quantities would cost most in Japan, then in EEC, and least in
USA and OOE.
Similar curves can be obtained for all regions. For example, the same proportional reductions
can be applied to all of EPPA’s twelve regions at the same time.19 Figure A4 displays the marginal
abatement curves thus obtained. It shows where it is the cheapest to abate carbon emissions (India
and China) and where it is the most expensive (Japan).
$0
$100
$200
$300
$400
$500
$600
$700
$800
0% 10% 20% 30% 40%
Carbon emissions reduction
Shadow price of carbon
($/ton)
JPN
OOE
EEC
USA
Figure A3. EPPA-Generated Marginal Abetaement Curves for 2010.
OECD Regions, Proportional Reductions, No Trading.
18 Although we often refer to CO2 emissions, all prices and quantities are in terms of carbon. Each ton of carbon
corresponds to 3.67 tons of carbon dioxide.
19 In doing so, we do not imply that non-Annex B countries assume quantitative national constraints, but only that
when faced with the corresponding price for carbon emission reductions, they choose to abate emissions in the
proportions indicated. The result is similar, but the motivation is different.
28
$0
$50
$100
$150
$200
$250
$300
$350
0% 10% 20% 30% 40%
Carbon emissions reduction
Shadow price of carbon ($/ton)
JPN BRA
EEC
EEX USA
OOE
EET FSU
CHN
IND
ROW
DAE
Figure A4. EPPA-Generated Martinal Abatement Curves for 2010.
All Regions, Proportional Reductions, No Trading.
Stating marginal cost in terms of the proportional reduction reveals the relative cost of carbon
abatement among the twelve EPPA regions, but it does not indicate the importance of various
regions in an emissions trading market. For example, as shown in Fig. A4, both China and India
are relatively low cost suppliers of abatement. However, as shown in Figure A5, China is a
significantly greater potential supplier of abatement than India by the simple fact that its reference
emissions are predicted to be 3.5 times as large (1,792 vs. 486 Mton).20 China is about 70% more
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
0 100 200 300 400 500 600 700
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
BRA
DAE
ROW
CHN
IND
EEX
USA
Figure A5. EPPA-Generated Marginal Abatement Curves for 2010.
Non-Annex B regions, Proportional Reductions, No Trading.
20 We include the USA in Figure A5 for comparison.
29
carbon intensive than India; and its economy is predicted to be about twice the size of India’s in
2010. As a result, for any given price, China supplies a much larger quantity of permits than India.
China is by far the largest potential source of emissions permits from the non-Annex B regions.For
instance, if the market price for emissions permits were $50, China would provide about 700 Mton
of emissions reduction, while the five other regions combined would provide only 400 Mton.
A.4 Assessing the “Robustness” of MACs with Regard to the Policy Applied
One question that arises immediately from our use of equal proportional reduction across regions to
generate the MACs is whether the location of these curves, or more generally, the cost associated
with any given level of carbon abatement, is affected by differing levels of abatement in other
regions. For instance, as can be seen in Table 1, the levels of implied abatement corresponding to
the Kyoto commitment are not strictly proportional, and with emissions trading, we would not
expect the percentage reductions among regions to remain the same. Will region R1’s MAC look
different depending on whether region R2 reduces by 10% or 40%? In a model with international
trade in all goods, such as EPPA, there is the possibility that a 40% reduction by region R2 would
alter trade flows such that abatement of, say, 100 Mton by R1 would cost more (or less) than if R2
reduced emissions by only 10%. This fundamental question is that of the robustness of the MACs.
And indeed, a drawing like Fig. 2 and the simple method we have deduced from it assume this
robustness (one curve for each region, whatever the reductions in other regions). The answer: they
are robust.
For example, Figure A6 shows simultaneously the two sets of MACs corresponding to
varying levels of OECD abatement assuming no emissions trading and fully efficient emissions
trading.21 The curves in both sets are similar (less than 10% variation in price for any given level of
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
0 100 200 300 400 500
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
JPN
OOE EEC
USA
No Trading
Trading
Figure A6. EPPA-Generated Marginal Abatement Curves for 2010.
OECD Proportional Reductions, No Trading and OECD Trading.
21 Note that, compared to Figures 3 and 4, the x-axis has been re-scaled to quantities.
30
abatement), thus showing that the MACs are robust with regard to this change of policy. We have
made similar comparisons for Annex B trading and global trading, and we have examined one
region’s MAC (the USA) when all other regions vary from reference to as much as a 60% reduction.
In all cases, we have found the same fundamental result: whatever the trading scheme, whatever the
extent of the market, the marginal abatement curves are almost identical. These model results indicate
that abatement cost in a region is largely independent of abatement efforts in other regions.
Our conclusion is that MACs, and more generally, the costs associated with a given level of
domestic abatement, are sufficiently insensitive to different levels of abatement among regions and
the scope of emissions trading to justify the analytic method applied here.
A.5 Analytical Approximations: A Simple Tool for Trade Studies
Robustness implies that at time T each region has a unique marginal abatement curve. This result
allows independent use of marginal abatement curves, once generated from CGE model, and
makes trade analysis straightforward. Such an analysis can be even further simplified if each curve
is described by a single mathematical expression because, once we have the equations of the
MACs, the cost calculations (i.e. integration under the curves) are simple and rapid.
Figure A7 shows, for the OECD regions, that we can fit very simple analytical curves to the
sets of plots resulting from the EPPA runs, and that those fits are very good (for each curve, R2
very close to 1.0). This result holds for all the other regions as well. The curves that best fit the
EPPA-generated plots are of the form: P = aQ2 + bQ, where Q is the amount of carbon abatement
in Mton and P is the marginal cost, or shadow price, of carbon in 1985 US$. By integration, the
total cost of abatement is C = 1/3 ´ aQ3 + 1/2 ´ bQ2. Table A2 displays the coefficients a and b for
each region in 2010, as well as the coefficient of determination R2.
y = 0.0024x2 + 0.1503x
y = 0.0155x2 + 1.816x y = 0.0085x2 – 0.0986x
y = 0.0005x2 + 0.0398x
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
0 100 200 300 400 500
Carbon emissions reduction (Mton)
Shadow price of carbon ($/ton)
JPN EEC
USA
OOE
R2 = 0.9938
R2 = 0.9951
R2 = 0.9981
R2 = 0.9923
Figure A7. Marginal Abatement Curves for 2010. OECD Regions, Polynomial Approximations.
31
Table A2. Coefficients of the Approximations of the MACs of the Form: P = aQ2 + bQ
Region a B R2 Region a b R2
USA 0.0005 0.0398 0.9923 EEX 0.0032 0.3029 0.9983
JPN 0.0155 1.816 0.9938 CHN 0.00007 0.0239 0.9992
EEC 0.0024 0.1503 0.9951 IND 0.0015 0.0787 0.9970
OOE 0.0085 – 0.0986 0.9981 DAE 0.0047 0.3774 0.9996
EET 0.0079 0.0486 0.9973 BRA 0.5612 8.4974 0.9997
FSU 0.0023 0.0042 0.9938 ROW 0.0021 0.0805 0.9967
In using these approximations, analysts should keep in mind that the price of this simplicity is
some loss of the details of the general equilibrium features of the underlying model. The
robustness of the curves assures us that the relation between price and quantity of abatement is
relatively fixed, but the curves do not capture all the effects of emissions trading. Since the EPPA
model remains our primary analysis tool, we have run the model in every policy case we studied in
order both to ensure that the approximations are not misleading and to capture any possible side
effects. The prices and quantities for abatement were all very close to the approximations, but there
is a side effect that the MACs do not show: “leakage.” When carbon emissions are constrained for
only a sub-set of regions, carbon emissions tend to “leak” to non-constrained regions.
Nevertheless, these effects are not essential to the analysis conducted here;22 and the analytical
approximations are a powerful computational shortcut to particular results. They also provide a
convenient way to represent graphically the results of the trading analysis.
A.6 Construction of Aggregate Supply and Demand Curves
Marginal abatement curves are the basis for determining
the demand and supply for emission permits in any given
market. Emission permits represent “rights to emit” and
these rights can be produced by some party abating more
than it is required to do, or undertaking some abatement
when not required to do so. The willingness of any party
to produce these permits is illustrated by Figure A8. The
vertical dotted line represents the amount of abatement
required for a region to meet its Kyoto commitment. In
the absence of any emissions trading it would abate the
amount indicated by the intersection of this line with the
MAC, and the corresponding price would be its autarkic
IMPORT
EXPORT
p
Kyoto q
Autarkic
marginal
price Lower
market
price
Higher
market
price
Figure A8. Willingness to Import /
Export with Regard to Market Price
of Permits.
marginal cost. If emissions trading were a possibility, the region would purchase or sell permits
according to the relation of the market price to its autarkic marginal cost.
22 A more extensive discussion of leakage, and its relation to hot air and emissions trading, is contained in Ellerman
and Decaux (1998).
32
• If the market price is lower than its autarkic marginal abatement cost, this region would be
willing to buy emission permits corresponding to the quantity difference between the autarkic
emission reduction and the domestic abatement it would undertake at the market price.
• Conversely, if the market price is higher than its autarkic marginal abatement cost, it would be
willing to undertake more abatement and supply the market with the “right to emit” the
corresponding quantity.
• Unconstrained regions, such as the non-Annex B regions or the FSU, are a special case. Their
autarkic marginal cost is zero, and they would be only suppliers to the market at any positive
price.
For whatever market one is considering, we simply add up the quantities (x-axis) potentially
supplied and those potentially demanded at each price (y-axis) across the constituent regions. As
we vary the price, we describe the demand and the supply curves for this market, and their
intersection indicates the market clearing price on the y-axis and the total quantity traded in that
market on the x-axis.
Figure A9 shows the aggregate demand and supply curves obtained in the Annex B and world
trading cases. The aggregate demand curve is the same in both the Annex B and the global market
because both include all Kyoto-constrained, i.e. potentially importing, regions. This single demand
curve intersects the horizontal axis at the quantity equal to the sum of the emission reductions
required to meet the Kyoto commitments, which is 1.31 Gton. This is the “Kyoto cap” represented
by a vertical dotted line on the figure; it is also the quantity of emission permits that would be
demanded if the price were $0/ton. At this price, the aggregate supply is the quantity of permits
available at no cost. This is the FSU’s 111 Mton of hot air.
As the price increases, the demand for permits diminishes, as more and more domestic
abatement is undertaken, and the supply of permits increases as more abatement is justified in the
unconstrained, exporting regions. As long as the market price is less than the lowest autarkic
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
0 200 400 600 800 1,000 1,200 1,400
Quantity (Mton)
Allowance price
Supply
World Trading
Demand
Supply
Annex B Trading
Kyoto Cap
Figure A9. Aggregated Supply and Demand Curves in 2010 under
Kytoo Constraints. Annex B Trading / World Trading.
33
marginal cost for the Kyoto-constrained regions, these regions are always on the demand side; and
the unconstrained regions are on the supply side. When the price reaches $116, the marginal cost
for EET, this region switches from the demand side to the supply side, resulting in a “kink” on the
demand and supply curves (which happens to be almost indiscernible because of the small
economic size of this region). Such a kink can readily be seen on both supply and demand curves
when the price reaches $186, the autarkic marginal cost for USA. There would be similar kinks at
$233 when OOE becomes a supplier and at $273 when the EEC does. At $584, the autarkic
marginal cost for Japan meeting the commitment, the demand for permits would be zero.
34
APPENDIX B: DATA TABLES
The following tables show the detailed results for cases studied in the text.
All the prices in the following tables are in 1985$. NAB = Non-Annex B regions
Repeat of Tables Shown in the Text
Table 1: Reference Emissions and Kyoto Commitments
Table 2: MACs Approximations Coefficients 3
Basic Cases – Reference Scenario
Table A: Kyoto No Trading
Table B: Annex B Trading
Table C: World Trading
Basic Cases – Low Growth Scenario
Table A': Kyoto No Trading
Table B': Annex B Trading
Table C': World Trading
Basic Cases – High Growth Scenario
Table A": Kyoto No Trading
Table B": Annex B Trading
Table C": World Trading
Import Limitations
Table D: Imports Limited to 75% of Total Reduction
Table E: Imports Limited to 50% of Total Reduction
Table F: Imports Limited to 25% of Total Reduction
CDM Surcharges
Table G: 25% Surcharge
Table H: 50% Surcharge
Table I: 100% Surcharge
Non-Competitive Behavior
Table J: World Trading, CDM Monopoly
Table K: World Trading, CDM + FSU Monopoly
Table L: World Trading, CDM + FSU Monopoly, with Imports Limited to 50% of Total Reduction
Inefficient Supply: Limited to 50% of Full Potential Supply
Table M: World Trading, Competitive Case
Table N: World Trading, CDM Monopoly
Table O: World Trading, CDM + FSU Monopoly
Table P: World Trading, Competitive Case, with Imports Limited to 50% of Total Reduction
Table Q: World Trading, CDM Monopoly, with Imports Limited to 50% of Total Reduction
Table R: World Trading, CDM + FSU Monopoly, with Imports Limited to 50% of Total Reduction
Table S: World Trading, Competitive Case, with Imports Limited to 25% of Total Reduction
Table T: World Trading, CDM Monopoly, with Imports Limited to 25% of Total Reduction
Table U: World Trading, CDM + FSU Monopoly, with Imports Limited to 25% of Total Reduction
Other Inefficient Suppy Cases: Limited to 25%, 15%, 10%, 5% of Full Potential Supply
Table V: World Trading, Competitive Case, Supply Limited to 25% of Full Potential
Table W: World Trading, Competitive Case, Supply Limited to 15% of Full Potential
Table X: World Trading, Competitive Case, Supply Limited to 10% of Full Potential
Table Y: World Trading, Competitive Case, Supply Limited to 5% of Full Potential
35
TABLE 1 - bis: Reference emissions and Kyoto commitments
Reference emissions USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Ref 1990 (Mton) 1362 298 822 318 266 3066 891 2022 5979 508 833 183 115 63 320
Ref 2010 (Mton) 1838 424 1064 472 395 4193 763 4142 9098 927 1792 486 308 97 532
low scenario 1748 412 1022 455 375 4012 737 3946 8695 903 1687 457 293 96 510
high scenario 1923 435 1102 488 416 4364 783 4327 9475 950 1891 514 323 98 551
Kyoto 0.93 0.94 0.92 0.95 1.04 \ 0.98 \ \ \ \ \ \ \ \
Emissions in 2010 (Mton) 1267 280 757 301 277 2881 873 4142 7896 927 1792 486 308 97 532
low scenario 1267 280 757 301 277 2881 873 3946 7700 903 1687 457 293 96 510
high scenario 1267 280 757 301 277 2881 873 4327 8081 950 1891 514 323 98 551
Reductions / ref 2010 (Mton) 572 144 307 171 118 1312 -111 0 1202 0 0 0 0 0 0
low scenario 481 132 266 154 98 1132 -136 0 995 0 0 0 0 0 0
high scenario 657 155 346 187 139 1484 -90 0 1393 0 0 0 0 0 0
TABLE 2 - bis: MACs approximations coefficients (P = aR2+ bR)
USA JPN EEC OOE EET FSU EEX CHN IND DAE BRA ROW
a 5.00E-4 1.55E-2 2.40E-3 8.50E-3 7.90E-3 2.30E-3 3.20E-3 7.00E-5 1.50E-3 4.70E-3 5.61E-1 2.10E-3
b 0.04 1.816 0.15 -0.099 0.049 0.004 0.303 0.024 0.079 0.377 8.497 0.081
BASIC CASES
TABLE A: Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 572 144 307 171 118 1312 0 1312
Marginal Costs ($/ton) 186 584 273 233 116 \ \ \
Cost of Abatement ($billion) 37.62 34.37 30.29 12.81 4.67 119.76 0.00 119.76
TABLE B: Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 466 49 201 128 124 968 234 1202
'Hot air' (Mton) \ \ \ \ \ 0 111 111
Permits Market Price ($/ton) 127 127 127 127 127 127 127 127
Cost of Abatement ($billion) 21.16 2.82 9.51 5.16 5.36 44.01 9.95 53.96
Permits exp(-)/imp(+) (Mton) 106 95 106 43 -6 345 -345 0
i.e % of commitment (import) 19% 66% 35% 25% \ 26% \ \
Flows exp(-)/imp(+) ($billion) 13.44 12.06 13.51 5.49 -0.73 43.77 -43.77 0.00
Total Cost ($billion) 34.60 14.88 23.02 10.64 4.64 87.78 -33.82 53.96
Gains from trade ($billion) 3.03 19.49 7.27 2.17 0.03 31.99 33.82 65.81
TABLE C: World trading
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 182 12 73 59 52 378 101 723 1202 51 437 102 42 2 89
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 24 24 24 24 24 24 24 24 24 24 24 24 24 24 24
Cost of Abatement ($billion) 1.66 0.14 0.71 0.41 0.43 3.36 0.81 6.99 11.15 0.54 4.22 0.95 0.44 0.03 0.81
Permits exp(-)/imp(+) (Mton) 390 132 234 112 66 935 -211 -723 0 -51 -437 -102 -42 -2 -89
i.e % of commitment (import) 68% 92% 76% 66% 56% 71% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 9.27 3.15 5.57 2.67 1.57 22.24 -5.03 -17.21 0.00 -1.21 -10.40 -2.44 -0.99 -0.06 -2.12
Total Cost ($billion) 10.94 3.29 6.29 3.09 2.01 25.60 -4.22 -10.22 11.15 -0.68 -6.17 -1.49 -0.55 -0.03 -1.31
Gains from trade ($billion) 26.69 31.08 24.00 9.73 2.66 94.16 4.22 10.22 108.61 0.68 6.17 1.49 0.55 0.03 1.31
36
BASIC CASES, low scenario
TABLE A': Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 481 132 266 154 98 1132 0 1132
Marginal Costs ($/ton) 135 510 210 187 81 \ \ \
Cost of Abatement ($billion) 23.19 27.74 20.36 9.24 2.71 83.24 0.00 83.24
TABLE B': Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 385 37 164 109 103 799 196 995
'Hot air' (Mton) \ \ \ \ \ 0 136 136
Permits Market Price ($/ton) 90 90 90 90 90 90 90 90
Cost of Abatement ($billion) 12.47 1.54 5.58 3.05 3.17 25.81 5.88 31.69
Permits exp(-)/imp(+) (Mton) 96 95 102 46 -5 333 -333 0
i.e % of commitment (import) 20% 72% 38% 30% \ 29% \ \
Flows exp(-)/imp(+) ($billion) 8.60 8.48 9.10 4.10 -0.48 29.79 -29.79 0.00
Total Cost ($billion) 21.08 10.01 14.67 7.14 2.69 55.59 -23.90 31.69
Gains from trade ($billion) 2.11 17.73 5.69 2.10 0.02 27.65 23.90 51.55
TABLE C': World trading
USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 152 9 60 52 44 316 86 593 995 41 358 85 33 2 74
'Hot air' (Mton) \ \ \ \ \ 0 136 0 136 \ \ \ \ \ \
Permits Market Price ($/ton) 18 18 18 18 18 18 18 18 18 18 18 18 18 18 18
Cost of Abatement ($billion) 1.04 0.08 0.44 0.26 0.27 2.09 0.51 4.30 6.90 0.32 2.60 0.59 0.26 0.02 0.51
Permits exp(-)/imp(+) (Mton) 330 123 206 103 54 816 -223 -593 0 -41 -358 -85 -33 -2 -74
i.e % of commitment (import) 68% 93% 78% 67% 55% 72% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 5.78 2.16 3.62 1.80 0.94 14.30 -3.91 -10.40 0.00 -0.71 -6.28 -1.49 -0.58 -0.03 -1.30
Total Cost ($billion) 6.82 2.24 4.06 2.06 1.22 16.39 -3.40 -6.10 6.90 -0.39 -3.68 -0.90 -0.32 -0.02 -0.79
Gains from trade ($billion) 16.37 25.50 16.31 7.18 1.49 66.85 3.40 6.10 76.35 0.39 3.68 0.90 0.32 0.02 0.79
BASIC CASES, high scenario
TABLE A'': Kyoto no trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 657 155 346 187 139 1484 0 1484
Marginal Costs ($/ton) 242 656 339 279 159 \ \ \
Cost of Abatement ($billion) 55.77 41.28 42.00 16.83 7.53 163.41 0.00 163.41
TABLE B'': Annex B trading
USA JPN EEC OOE EET oecd+
eet
FSU World
Reductions / ref 2010 (Mton) 540 61 235 146 143 1124 269 1393
'Hot air' (Mton) \ \ \ \ \ 0 90 90
Permits Market Price ($/ton) 167 167 167 167 167 167 167 167
Cost of Abatement ($billion) 32.09 4.51 14.48 7.81 8.12 67.00 15.06 82.06
Permits exp(-)/imp(+) (Mton) 116 95 111 41 -4 359 -359 0
i.e % of commitment (import) 18% 61% 32% 22% \ 24% \ \
Flows exp(-)/imp(+) ($billion) 19.49 15.84 18.57 6.84 -0.61 60.14 -60.14 0.00
Total Cost ($billion) 51.58 20.35 33.05 14.65 7.51 127.14 -45.08 82.06
Gains from trade ($billion) 4.19 20.93 8.95 2.18 0.01 36.27 45.08 81.36
37
TABLE C'': World trading
USA JPN EEC OOE EET oecd+
eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 210 15 85 66 59 435 114 844 1393 61 510 118 50 3 103
'Hot air' (Mton) \ \ \ \ \ 0 90 0 90 \ \ \ \ \ \
Permits Market Price ($/ton) 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30
Cost of Abatement ($billion) 2.42 0.22 1.05 0.60 0.63 4.90 1.16 10.26 16.33 0.80 6.19 1.38 0.66 0.04 1.18
Permits exp(-)/imp(+) (Mton) 447 141 260 121 80 1049 -204 -844 0 -61 -510 -118 -50 -3 -103
i.e % of commitment (import) 68% 90% 75% 65% 58% 71% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 13.57 4.27 7.90 3.68 2.43 31.84 -6.20 -25.64 0.00 -1.85 -15.47 -3.60 -1.51 -0.09 -3.11
Total Cost ($billion) 15.98 4.48 8.95 4.28 3.05 36.74 -5.04 -15.37 16.33 -1.05 -9.28 -2.21 -0.85 -0.05 -1.94
Gains from trade ($billion) 39.79 36.80 33.05 12.56 4.48 126.67 5.04 15.37 147.09 1.05 9.28 2.21 0.85 0.05 1.94
IMPORT LIMITATIONS
TABLE D: 75%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 178 36 77 58 51 399 99 704 1202 49 425 100 40 2 87
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 23 23 23 23 23 23 23 23 23 23 23 23 23 23 23
Cost of Abatement ($billion) 1.56 1.42 0.81 0.39 0.41 4.58 0.76 6.54 11.88 0.50 3.96 0.89 0.41 0.03 0.76
Permits exp(-)/imp(+) (Mton) 394 108 230 113 67 913 -209 -704 0 -49 -425 -100 -40 -2 -87
i.e % of commitment (import) 69% 75% 75% 66% 57% 68% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 8.99 2.47 5.26 2.59 1.54 20.84 -4.77 -16.07 0.00 -1.13 -9.70 -2.28 -0.92 -0.05 -1.98
Total Cost ($billion) 10.55 3.89 6.06 2.97 1.94 25.42 -4.02 -9.52 11.88 -0.63 -5.75 -1.39 -0.51 -0.03 -1.22
Gains from trade ($billion) 27.07 30.48 24.22 9.84 2.73 94.34 4.02 9.52 107.88 0.63 5.75 1.39 0.51 0.03 1.22
D gain in % / no limit (table C) 1 -2 1 1 2 0 -5 -7 -1 -7 -7 -7 -7 -8 -7
TABLE E: 50%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 72 154 86 59 656 73 473 1202 31 286 69 25 1 60
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 13 13 13 13 13 13 13 13 13 13 13 13 13 13 $13
Cost of Abatement ($billion) 5.52 6.66 4.67 1.42 0.63 18.89 0.31 2.50 21.70 0.18 1.52 0.35 0.15 0.01 0.30
Permits exp(-)/imp(+) (Mton) 286 72 154 86 59 656 -183 -473 0 -31 -286 -69 -25 -1 -60
i.e % of commitment (import) 50% 50% 50% 50% 50% 49% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 3.58 0.90 1.93 1.07 0.74 8.23 -2.30 -5.93 0.00 -0.39 -3.58 -0.86 -0.32 -0.02 -0.76
Total Cost ($billion) 9.10 7.56 6.60 2.50 1.37 27.12 -1.99 -3.42 21.70 -0.21 -2.06 -0.51 -0.17 -0.01 -0.46
Gains from trade ($billion) 28.53 26.81 23.69 10.32 3.30 92.64 1.99 3.42 98.06 0.21 2.06 0.51 0.17 0.01 0.46
D gain in % / no limit (table C) 7 -14 -1 6 24 -2 -53 -67 -10 -69 -67 -65 -69 -71 -65
TABLE F: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 429 108 230 129 89 984 38 180 1202 10 108 28 8 0 25
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 2.02 54.94 0.04 0.28 55.26 0.02 0.17 0.04 0.01 0.00 0.04
Permits exp(-)/imp(+) (Mton) 143 36 77 43 30 328 -148 -180 0 -10 -108 -28 -8 0 -25
i.e % of commitment (import) 25% 25% 25% 25% 25% 24% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 0.48 0.12 0.26 0.15 0.10 1.11 -0.50 -0.61 0.00 -0.03 -0.37 -0.10 -0.03 0.00 -0.09
Total Cost ($billion) 17.27 17.28 14.04 5.35 2.12 56.05 -0.46 -0.33 55.26 -0.02 -0.20 -0.05 -0.01 0.00 -0.05
Gains from trade ($billion) 20.35 17.09 16.25 7.47 2.55 63.72 0.46 0.33 64.51 0.02 0.20 0.05 0.01 0.00 0.05
D gain in % / no limit (table C) -24 -45 -32 -23 -4 -32 -89 -97 -41 -97 -97 -96 -97 -98 -96
38
CDM SURCHARGES
TABLE G: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRAROW
Reductions / ref 2010 (Mton) 198 14 80 63 56 410 108 687 1205 48 415 98 39 2 85
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 27 27 27 27 27 27 27 22 \ 22 22 22 22 22 22
Cost of Abatement ($billion) 2.07 0.18 0.89 0.51 0.54 4.19 1.00 6.15 11.34 0.47 3.72 0.84 0.38 0.02 0.72
Permits exp(-)/imp(+) (Mton) 374 131 227 108 62 902 -219 -687 -3 -48 -415 -98 -39 -2 -85
i.e % of commitment (import) 65% 91% 74% 63% 53% 67% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 10.26 3.58 6.23 2.98 1.70 24.75 -6.01 -15.07 3.68 -1.05 -9.10 -2.14 -0.86 -0.05 -1.86
Total Cost ($billion) 12.32 3.76 7.13 3.49 2.24 28.94 -5.01 -8.92 15.02 -0.59 -5.38 -1.30 -0.48 -0.03 -1.15
Gains from trade ($billion) 25.30 30.60 23.16 9.33 2.43 90.82 5.01 8.92 104.75 0.59 5.38 1.30 0.48 0.03 1.15
D gain in % / no limit (table C) -5 -2 -3 -4 -9 -4 19 -13 -4 -14 -13 -12 -14 -14 -12
TABLE H: 50%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 211 15 86 66 59 436 114 654 1205 45 395 93 37 2 81
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 31 31 31 31 31 31 31 20 \ 20 20 20 20 20 20
Cost of Abatement ($billion) 2.44 0.22 1.06 0.60 0.63 4.95 1.17 5.46 11.58 0.41 3.30 0.75 0.34 0.02 0.64
Permits exp(-)/imp(+) (Mton) 361 129 221 105 59 876 -225 -654 -3 -45 -395 -93 -37 -2 -81
i.e % of commitment (import) 63% 90% 72% 61% 50% 65% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 11.03 3.95 6.76 3.22 1.80 26.76 -6.87 -13.32 6.57 -0.93 -8.05 -1.90 -0.75 -0.04 -1.65
Total Cost ($billion) 13.47 4.17 7.82 3.82 2.43 31.71 -5.70 -7.86 18.15 -0.51 -4.74 -1.15 -0.42 -0.02 -1.01
Gains from trade ($billion) 24.16 30.20 22.46 9.00 2.24 88.06 5.70 7.86 101.61 0.51 4.74 1.15 0.42 0.02 1.01
D gain in % / no limit (table C) -9 -3 -6 -8 -16 -6 35 -23 -6 -24 -23 -23 -24 -26 -22%
TABLE I: 100%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 231 17 95 71 64 479 124 602 1204 41 364 86 34 2 75
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 36 36 36 36 36 36 36 18 \ 18 18 18 18 18 18
Cost of Abatement ($billion) 3.12 0.30 1.36 0.77 0.80 6.34 1.49 4.46 12.30 0.33 2.70 0.61 0.27 0.02 0.53
Permits exp (-)/imp(+) (Mton) 341 127 212 100 54 834 -235 -602 -2 -41 -364 -86 -34 -2 -75
i.e % of commitment (import) 60% 88% 69% 59% 45% 62% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 12.22 4.56 7.62 3.60 1.93 29.92 -8.41 -10.79 10.71 -0.74 -6.52 -1.55 -0.60 -0.03 -1.35
Total Cost ($billion) 15.34 4.85 8.98 4.37 2.73 36.26 -6.92 -6.33 23.01 -0.41 -3.82 -0.93 -0.33 -0.02 -0.82
Gains from trade ($billion) 22.29 29.52 21.31 8.45 1.94 83.50 6.92 6.33 96.76 0.41 3.82 0.93 0.33 0.02 0.82
D gain in % / no limit (table C) -16 -5 -11 -13 -27 -11 64 -38 -11 -40 -38 -37 -40 -42 -37
NON-COMPETITIVE BEHAVIOR
TABLE J: World trading, CDM monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 317 28 133 92 86 656 164 382 1202 24 230 56 20 1 50
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 63 63 63 63 63 63 63 63 63 63 63 63 63 63 63
Cost of Abatement ($billion) 7.29 0.82 3.24 1.78 1.86 14.99 3.45 1.52 19.96 0.10 0.92 0.22 0.08 0.00 0.19
Permits exp(-)/imp(+) (Mton) 255 116 174 79 32 656 -275 -382 0 -24 -230 -56 -20 -1 -50
i.e % of commitment (import) 45% 81% 57% 46% 27% 50% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.99 7.30 10.91 4.99 2.00 41.19 -17.24 -23.94 0.00 -1.52 -14.46 -3.54 -1.23 -0.06 -3.13
Total Cost ($billion) 23.28 8.12 14.14 6.77 3.86 56.17 -13.79 -22.43 19.96 -1.42 -13.54 -3.33 -1.15 -0.06 -2.94
Gains from trade ($billion) 14.34 26.25 16.15 6.05 0.80 63.59 13.79 22.43 99.81 1.42 13.54 3.33 1.15 0.06 2.94
39
TABLE K: World trading, CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 417 42 179 116 112 866 51 285 1202 17 172 43 14 1 38
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 108 108 108 108 108 108 108 108 108 108 108 108 108 108 108
Cost of Abatement ($billion) 15.58 1.99 6.99 3.80 3.96 32.31 0.11 0.77 33.20 0.05 0.47 0.11 0.04 0.00 0.10
Permits exp(-)/imp(+) (Mton) 154 102 128 55 7 446 -161 -285 0 -17 -172 -43 -14 -1 -38
i.e % of commitment (import) 27% 71% 42% 32% 6% 34% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.69 11.06 13.89 5.95 0.70 48.29 -17.47 -30.82 0.00 -1.86 -18.58 -4.66 -1.51 -0.08 -4.15
Total Cost ($billion) 32.28 13.05 20.87 9.75 4.66 80.61 -17.36 -30.05 33.20 -1.81 -18.11 -4.54 -1.47 -0.07 -4.05
Gains from trade ($billion) 5.35 21.32 9.41 3.06 0.01 39.16 17.36 30.05 86.57 1.81 18.11 4.54 1.47 0.07 4.05
TABLE L: 50% - CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 417 72 179 116 111 895 48 259 1202 15 156 39 12 1 35
'Hot air' (Mton) \ \ \ \ \ 0 111 0 111 \ \ \ \ \ \
Permits Market Price ($/ton) 103 103 103 103 103 103 103 103 103 103 103 103 103 103 103
Cost of Abatement ($billion) 15.52 6.66 6.96 3.78 3.94 36.85 0.09 0.63 37.56 0.04 0.38 0.09 0.03 0.00 0.08
Permits exp(-)/imp(+) (Mton) 155 72 129 55 7 417 -158 -259 0 -15 -156 -39 -12 -1 -35
i.e % of commitment (import) 27% 50% 42% 32% 6% 31% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.02 7.46 13.30 5.70 0.69 43.16 -16.36 -26.80 0.00 -1.60 -16.14 -4.08 -1.29 -0.06 -3.64
Total Cost ($billion) 31.53 14.11 20.25 9.49 4.63 80.01 -16.27 -26.17 37.56 -1.56 -15.76 -3.98 -1.26 -0.06 -3.56
Gains from trade ($billion) 6.09 20.26 10.03 3.33 0.04 39.75 16.27 26.17 82.20 1.56 15.76 3.98 1.26 0.06 3.56
D gain in % / no limit (table C) -77 -35 -58 -66 -98 -58 285 156 -24 129 155 168 128 106 173
INEFFICIENT SUPPLY - 50%
TABLE M: competitive case
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 24 120 84 78 593 75 590 1257 45 355 81 36 2 70
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 52 52 52 52 52 52 52 52 52 52 52 52 52 52 52
Cost of Abatement ($billion) 5.53 0.59 2.45 1.36 1.42 11.34 1.32 11.98 24.63 0.98 7.20 1.59 0.80 0.06 1.35
Permits exp(-)/imp(+) (Mton) 285 120 188 87 40 720 -130 -590 0 -45 -355 -81 -36 -2 -70
i.e % of commitment (import) 50% 83% 61% 51% 34% 55% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 14.94 6.29 9.82 4.55 2.08 37.67 -6.82 -30.86 0.00 -2.33 -18.59 -4.25 -1.90 -0.12 -3.66
Total Cost ($billion) 20.47 6.88 12.26 5.90 3.49 49.01 -5.50 -18.88 24.63 -1.35 -11.39 -2.66 -1.10 -0.07 -2.31
Gains from trade ($billion) 17.15 27.48 18.03 6.91 1.18 70.75 5.50 18.88 95.13 1.35 11.39 2.66 1.10 0.07 2.31
D gain in % / no limit (table C) -36 -12 -25 -29 -56 -25 30 85 -12 99 85 79 100 121 77
TABLE N: CDM monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 385 37 164 109 103 799 98 360 1257 25 217 51 21 1 44
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90
Cost of Abatement ($billion) 12.48 1.54 5.58 3.05 3.17 25.83 2.94 3.45 32.22 0.26 2.09 0.47 0.22 0.01 0.40
Permits exp(-)/imp(+) (Mton) 186 107 143 63 15 513 -153 -360 0 -25 -217 -51 -21 -1 -44
i.e % of commitment (import) 33% 74% 46% 37% 12% 39% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.68 9.56 12.79 5.62 1.31 45.97 -13.74 -32.23 0.00 -2.27 -19.46 -4.57 -1.85 -0.11 -3.97
Total Cost ($billion) 29.17 11.10 18.37 8.67 4.48 71.79 -10.80 -28.77 32.22 -2.01 -17.38 -4.10 -1.63 -0.09 -3.57
Gains from trade ($billion) 8.46 23.27 11.91 4.15 0.19 47.97 10.80 28.77 87.54 2.01 17.38 4.10 1.63 0.09 3.57
D gain in % / no limit (table C) -68 -25 -50 -57 -93 -49 156 181 -19 196 182 175 197 212 173
40
TABLE O: CDM+FSU monopoly
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 434 45 187 121 116 902 45 310 1257 21 187 44 17 1 39
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 112 112 112 112 112 112 112 112 112 112 112 112 112 112 112
Cost of Abatement ($billion) 17.43 2.26 7.82 4.25 4.42 36.18 0.28 2.40 38.87 0.18 1.45 0.33 0.15 0.01 0.28
Permits exp(-)/imp(+) (Mton) 137 100 121 51 2 410 -100 -310 0 -21 -187 -44 -17 -1 -39
i.e % of commitment (import) 24% 69% 39% 30% 2% 31% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.31 11.13 13.46 5.67 0.24 45.82 -11.17 -34.65 0.00 -2.39 -20.94 -4.96 -1.94 -0.11 -4.32
Total Cost ($billion) 32.74 13.39 21.29 9.92 4.67 82.00 -10.89 -32.25 38.87 -2.21 -19.48 -4.63 -1.79 -0.10 -4.04
Gains from trade ($billion) 4.89 20.98 9.00 2.89 0.00 37.76 10.89 32.25 80.90 2.21 19.48 4.63 1.79 0.10 4.04
D gain in % / no limit (table C) -82 -33 -62 -70 -100 -60 158 215 -26 225 216 211 226 234 209
TABLE P: competitive case - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 286 72 154 86 71 668 68 522 1257 39 315 72 32 2 62
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 43 43 43 43 43 43 43 43 43 43 43 43 43 43 43
Cost of Abatement ($billion) 5.52 6.66 4.67 1.42 1.05 19.31 0.97 8.75 29.03 0.70 5.27 1.17 0.58 0.04 0.99
Permits exp(-)/imp(+) (Mton) 286 72 154 86 47 645 -123 -522 0 -39 -315 -72 -32 -2 -62
i.e % of commitment (import) 50% 50% 50% 50% 40% 49% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 12.22 3.08 6.57 3.66 2.03 27.56 -5.26 -22.30 0.00 -1.66 -13.45 -3.09 -1.35 -0.09 -2.67
Total Cost ($billion) 17.73 9.74 11.24 5.08 3.08 46.87 -4.29 -13.55 29.03 -0.95 -8.18 -1.92 -0.78 -0.05 -1.67
Gains from trade ($billion) 19.89 24.63 19.05 7.73 1.59 72.89 4.29 13.55 90.73 0.95 8.18 1.92 0.78 0.05 1.67
D gain in % / no limit (table C) -25 -21 -21 -21 -40 -23 1 33 -16 41 33 29 41 51 28
TABLE Q: CDM monopoly - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 379 72 161 107 102 821 97 339 1257 24 205 48 19 1 42
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 87 87 87 87 87 87 87 87 87 87 87 87 87 87 87
Cost of Abatement ($billion) 11.91 6.66 5.32 2.91 3.03 29.82 2.81 2.99 35.63 0.23 1.81 0.41 0.19 0.01 0.35
Permits exp(-)/imp(+) (Mton) 193 72 146 64 16 491 -152 -339 0 -24 -205 -48 -19 -1 -42
i.e % of commitment (import) 34% 50% 47% 38% 14% 37% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.74 6.26 12.65 5.59 1.41 42.65 -13.19 -29.46 0.00 -2.06 -17.80 -4.19 -1.68 -0.10 -3.64
Total Cost ($billion) 28.65 12.91 17.98 8.49 4.44 72.47 -10.38 -26.47 35.63 -1.83 -15.99 -3.78 -1.49 -0.08 -3.30
Gains from trade ($billion) 8.98 21.45 12.31 4.32 0.23 47.29 10.38 26.47 84.14 1.83 15.99 3.78 1.49 0.08 3.30
D gain in % / no limit (table C) -66 -31 -49 -56 -91 -50 146 159 -23 170 159 154 170 182 152
TABLE R: CDM+FSU monopoly - with 50% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 432 72 186 120 115 926 42 289 1257 20 175 42 16 1 36
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 111 111 111 111 111 111 111 111 111 111 111 111 111 111 111
Cost of Abatement ($billion) 17.20 6.66 7.72 4.19 4.36 40.14 0.24 2.02 42.40 0.15 1.23 0.28 0.12 0.01 0.24
Permits exp(-)/imp(+) (Mton) 139 72 121 51 3 387 -98 -289 0 -20 -175 -42 -16 -1 -36
i.e % of commitment (import) 24% 50% 40% 30% 2% 29% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 15.40 7.98 13.45 5.68 0.30 42.81 -10.81 -32.00 0.00 -2.18 -19.34 -4.60 -1.77 -0.10 -4.02
Total Cost ($billion) 32.61 14.64 21.17 9.88 4.66 82.95 -10.57 -29.98 42.40 -2.03 -18.11 -4.32 -1.65 -0.09 -3.78
Gains from trade ($billion) 5.02 19.73 9.12 2.94 0.01 36.81 10.57 29.98 77.36 2.03 18.11 4.32 1.65 0.09 3.78
D gain in % / no limit (table C ) -81 -37 -62 -70 -100 -61 150 193 -29 199 193 190 199 203 189
41
TABLE S: competitive case - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton ) 429 108 230 129 89 984 36 236 1257 16 143 34 13 1 30
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ ton) 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 2.02 54.94 0.15 1.25 56.34 0.09 0.76 0.18 0.07 0.00 0.15
Permits exp(-)/imp(+) (Mton) 143 36 77 43 30 328 -92 -236 0 -16 -143 -34 -13 -1 -30
i.e % of commitmen t (import) 25% 25% 25% 25% 25% 25% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+ ) ( $billion) 1.79 0.45 0.96 0.54 0.37 4.11 -1.15 -2.96 0.00 -0.20 -1.79 -0.43 -0.16 -0.01 -0.38
Total Cost ($billion) 18.58 17.61 14.74 5.74 2.39 59.05 -1.00 -1.71 56.34 -0.11 -1.03 -0.26 -0.09 0.00 -0.23
Gains from trade ($billion) 19.05 16.76 15.55 7.07 2.28 60.71 1.00 1.71 63.42 0.11 1.03 0.26 0.09 0.00 0.23
D gain in % / no limit (table C) -29 -46 -35 -27 -14 -36 -76 -83 -42 -84 -83 -83 -84 -85 -83
TABLE T: CDM monopoly - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 429 108 230 129 114 1010 108 139 1257 8 84 21 7 0 19
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 109 109 109 109 109 109 109 109 109 109 109 109 109 109 109
Cost of Abatement ($billion) 16.79 17.15 13.77 5.20 4.26 57.18 3.95 0.36 61.49 0.02 0.22 0.05 0.02 0.00 0.05
Permits exp(-)/imp(+) (Mton) 143 36 77 43 4 302 -164 -139 0 -8 -84 -21 -7 0 -19
i.e % of commitmen t (import) 25% 25% 25% 25% 3% 23% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+)($billion) 15.57 3.93 8.37 4.67 0.40 32.93 -17.83 -15.10 0.00 -0.91 -9.10 -2.29 -0.73 -0.04 -2.04
Total Cost ($billion) 32.36 21.08 22.14 9.87 4.66 90.11 -13.88 -14.74 61.49 -0.89 -8.88 -2.23 -0.72 -0.04 -1.99
Gains from trade ($billion) 5.27 13.29 8.14 2.94 0.01 29.66 13.88 14.74 58.27 0.89 8.88 2.23 0.72 0.04 1.99
D gain in % / no limit (table C) -80 -57 -66 -70 -100 -69 229 44 -46 31 44 50 30 18 52
TABLE U: CDM+FSU monopoly - with 25% limitation on imports
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions /ref 2010 (Mton) 447 108 230 129 119 1034 31 192 1257 12 116 28 10 1 25
'Hot air' (Mton) \ \ \ \ \ 0 55 0 55 \ \ \ \ \ \
Permits Market Price ($/ton) 118 118 118 118 118 118 118 118 118 118 118 118 118 118 118
Cost of Abatement ($billion) 18.92 17.15 13.77 5.20 4.80 59.85 0.10 0.77 60.72 0.05 0.47 0.11 0.04 0.00 0.09
Permits exp(-)/imp(+) (Mton) 124 36 77 43 -1 279 -87 -192 0 -12 -116 -28 -10 -1 -25
i.e % of commitment (import) 22% 25% 25% 25% \ 21% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 14.64 4.25 9.06 5.05 -0.13 32.87 -10.22 -22.65 0.00 -1.44 -13.68 -3.35 -1.17 -0.06 -2.96
Total Cost ($billion) 33.55 21.41 22.83 10.26 4.67 92.71 -10.12 -21.88 60.71 -1.39 -13.21 -3.24 -1.12 -0.06 -2.86
Gains from trade ($billion) 4.07 12.96 7.46 2.56 0.00 27.05 10.12 21.88 59.05 1.39 13.21 3.24 1.12 0.06 2.86
D gain in % / no limit (table C) -85 -58 -69 -74 -100 -71 140 114 -46 105 114 118 104 94 119
OTHER INEFFICIENT SUPPLIES: 25%, 15%, 10%, 5%, competitive cases
TABLE V: 25%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 395 39 169 111 106 819 50 415 1285 33 250 56 27 2 48
'Hot air' (Mton) \ \ \ \ \ 0 28 0 28 \ \ \ \ \ \
Permits Market Price ($/ton) 94 94 94 94 94 94 94 94 94 94 94 94 94 94 94
Cost of Abatement ($billion) 13.37 1.67 5.98 3.26 3.40 27.68 1.58 14.67 43.92 1.23 8.79 1.92 1.01 0.08 1.63
Permits exp(-)/imp(+) (Mton) 177 105 138 60 12 493 -78 -415 0 -33 -250 -56 -27 -2 -48
i.e % of commitment(import) 31% 73% 45% 35% 10% 38% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 16.55 9.88 12.97 5.66 1.14 46.21 -7.30 -38.91 0.00 -3.05 -23.40 -5.27 -2.50 -0.17 -4.52
Total Cost ($billion) 29.92 11.54 18.96 8.93 4.54 73.89 -5.72 -24.24 43.92 -1.82 -14.60 -3.35 -1.49 -0.10 -2.89
Gains from trade ($billion) 7.70 22.82 11.33 3.89 0.13 45.88 5.72 24.24 75.84 1.82 14.60 3.35 1.49 0.10 2.89
D gain in % / no limit (table C) -71 -27 -53 -60 -95 -51 35 137 -30 168 137 125 170 220 121
42
TABLE W: 15%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 465 49 200 128 123 965 35 296 1296 24 178 40 19 1 34
'Hot air' (Mton) \ \ \ \ \ 0 17 0 17 \ \ \ \ \ \
Permits Market Price ($/ton) 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126
Cost of Abatement ($billion) 21.00 2.79 9.44 5.12 5.32 43.68 0.54 6.04 50.26 0.56 3.60 0.75 0.46 0.04 0.63
Permits exp(-)/imp(+) (Mton) 107 95 107 44 -5 347 -52 -296 0 -24 -178 -40 -19 -1 -34
i.e % of commitment (import) 19% 66% 35% 25% -5% 26% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 13.53 12.02 13.51 5.50 -0.68 43.88 -6.52 -37.36 0.00 -2.98 -22.44 -5.03 -2.44 -0.18 -4.30
Total Cost ($billion) 34.53 14.82 22.96 10.62 4.64 87.56 -5.98 -31.32 50.26 -2.42 -18.84 -4.27 -1.98 -0.13 -3.67
Gains from trade ($billion) 3.09 19.55 7.33 2.20 0.03 32.20 5.98 31.32 69.51 2.42 18.84 4.27 1.98 0.13 3.67
D gain in % / no limit (table C) -88 -37 -69 -77 -99 -66 42 206 -36 256 205 187 259 347 181
TABLE X: 10%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010
(Mton)
509 56 221 139 135 1059 25 217 1301 17 130 29 14 1 25
'Hot air' (Mton) \ \ \ \ \ 0 11 0 11 \ \ \ \ \ \
Permits Market Price ($/ton) 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150
Cost of Abatement ($billion) 27.16 3.74 12.24 6.61 6.88 56.62 0.21 2.76 59.59 0.27 1.64 0.33 0.23 0.02 0.27
Permits exp(-)/imp(+) (Mton) 62 88 87 33 -17 253 -36 -217 0 -17 -130 -29 -14 -1 -25
i.e % of commitment (import) 11% 61% 28% 19% -14% 19% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ($billion) 9.36 13.24 12.99 4.90 -2.50 37.98 -5.47 -32.52 0.00 -2.61 -19.52 -4.36 -2.14 -0.16 -3.73
Total Cost ($billion) 36.51 16.97 25.23 11.51 4.38 94.60 -5.26 -29.75 59.59 -2.34 -17.88 -4.03 -1.91 -0.13 -3.46
Gains from trade ($billion) 1.11 17.40 5.06 1.30 0.29 25.16 5.26 29.75 60.18 2.34 17.88 4.03 1.91 0.13 3.46
D gain in % / no limit (table C) -96 -44 -79 -87 -89 -73 25 191 -45 244 190 171 248 348 165
TABLE Y: 5%
USA JPN EEC OOE EET oecd
+eet
FSU NAB World EEX CHN IND DAE BRA ROW
Reductions / ref 2010 (Mton) 563 64 245 152 148 1172 14 120 1307 10 72 16 8 1 14
'Hot air' (Mton) \ \ \ \ \ 0 6 0 6 \ \ \ \ \ \
Permits Market Price ($/ton) 181 181 181 181 181 181 181 181 181 181 181 181 181 181 181
Cost of Abatement ($billion) 36.05 5.13 16.28 8.77 9.12 75.35 0.04 0.67 76.05 0.07 0.39 0.07 0.06 0.01 0.06
Permits exp(-)/imp(+) (Mton) 9 80 62 20 -30 140 -20 -120 0 -10 -72 -16 -8 -1 -14
i.e % of commitment (import) 2% 55% 20% 11% -26% 11% \ \ \ \ \ \ \ \ \
Flows exp(-)/imp(+) ( $billion) 1.55 14.45 11.25 3.54 -5.47 25.33 -3.53 -21.80 0.00 -1.76 -13.08 -2.91 -1.45 -0.11 -2.49
Total Cost ($billion) 37.60 19.58 27.53 12.32 3.65 100.68 -3.49 -21.13 76.05 -1.69 -12.69 -2.84 -1.39 -0.10 -2.43
Gains from trade ($billion) 0.02 14.79 2.76 0.50 1.02 19.09 3.49 21.13 43.71 1.69 12.69 2.84 1.39 0.10 2.43
D gain in % /no limit (table C) -100 -52 -89 -95 -62 -80 -17 107 -60 149 106 91 152 236 86
