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False confidences: forecasting errors and emission caps in CO 2 trading systems

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  • Michael Grubb
  • Federico Ferrario

Abstract

This Commentary sets out four lines of evidence to argue both that emission forecasts are intrinsically uncertain , and that there is clear evidence of projection inflation in the forecasts of sector emissions used to underpin the setting of sector caps in emission trading systems. From a limited evidence base, we conclude that uncertainty is at least ±2%/year, overlaying an upward bias (projection inflation) on the order of 1%/year, cumulative. The Commentary concludes that this has important implications both for allocation approaches, and for some other design elements in the EU ETS. Forecasting uncertainty is not an inconvenience which is best ignored, but a fundamental fact that must be accommodated in the future design of the EU ETS and other CO-super-2 emission trading schemes.

Suggested Citation

  • Michael Grubb & Federico Ferrario, 2006. "False confidences: forecasting errors and emission caps in CO 2 trading systems," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 495-501, July.
    • Handle: RePEc:taf:tcpoxx:v:6:y:2006:i:4:p:495-501
    DOI: 10.1080/14693062.2006.9685615
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    References listed on IDEAS

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    1. Stefan P. Schleicher & Claudia Kettner & Angela Köppl & Gregor Thenius, 2007. "Stringency and Distribution in the EU Emissions Trading Scheme –The 2005 Evidence," Working Papers 2007.22, Fondazione Eni Enrico Mattei.
    2. Jones, Randall Jr., 1989. "The politics of energy forecasting: A comparative study of energy forecasting in western Europe and north America : (Oxford University Press, New York, 1987) $67.00, [UK pound]32.50, pp.314," International Journal of Forecasting, Elsevier, vol. 5(1), pages 133-135.
    3. Barbara Buchner & Denny Ellerman, 2006. "Over-Allocation or Abatement? A Preliminary Analysis of the Eu Ets Based on the 2005 Emissions Data," Working Papers 2006.139, Fondazione Eni Enrico Mattei.
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    Cited by:

    1. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, vol. 34(1), pages 327-334.
    2. Séverine Blaise, 2011. "After Kyoto: what approach in the face of climate change? [L'après Kyoto : quelle approche face au changement climatique ?]," Post-Print hal-02379972, HAL.
    3. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
    4. Emilie Alberola & Julien Pierre Chevallier & Benoît Chèze, 2007. "European carbon prices fundamentals in 2005-2007: the effects of energy markets, temperatures and sectorial production," EconomiX Working Papers 2007-33, University of Paris Nanterre, EconomiX.
    5. Séverine Blaise, 2011. "L'après Kyoto : quelle approche face au changement climatique ?," Mondes en développement, De Boeck Université, vol. 0(2), pages 103-120.

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