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The European Union’s potential for strategic emissions trading in a post-Kyoto climate agreement

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  • Johan Eyckmans
  • Cathrine Hagem

    ()
    (Statistics Norway)

Abstract

The literature suggests that Russia and Ukraine may become large sellers of greenhouse gas emissions permits under the Kyoto Protocol and might exploit their market power to maximize trading profits. The EU countries taken together will probably be net buyers of permits. For any given global target for emission, participation by developing countries with low-cost abatement options would benefit the net buyers of permits because the market price for carbon permits would go down. We explore how the EU could benefit from a broader participation through specific bilateral agreements with developing countries in the post-Kyoto period. The bilateral agreement involves a minimum permit sales requirement which is compensated by a financial transfer from EU to the developing country. Such bilateral agreement enables the EU to act strategically in the permit market on behalf of its member states, although firms in each member state are assumed to be price takers in the permit market. In a numerical simulation we show that an appropriately designed bilateral agreement between the EU and China can cut EU’s total compliance cost by one third.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 530.

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Date of creation: Feb 2008
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Handle: RePEc:ssb:dispap:530

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Keywords: emissions permits; post-Kyoto climate agreement; strategic permit trading;

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  1. Criqui, Patrick & Mima, Silvana & Viguier, Laurent, 1999. "Marginal abatement costs of CO2 emission reductions, geographical flexibility and concrete ceilings: an assessment using the POLES model," Energy Policy, Elsevier, vol. 27(10), pages 585-601, October.
  2. Christoph Bohringer, 2002. "Climate Politics from Kyoto to Bonn: From Little to Nothing?," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2), pages 51-71.
  3. Fischer, Carolyn, 2004. "Project-Based Mechanisms for Emissions Reductions: Balancing Trade-offs with Baselines," Discussion Papers, Resources For the Future dp-04-32, Resources For the Future.
  4. Parkash Chander & Henry Tulkens, 1995. "A core-theoretic solution for the design of cooperative agreements on transfrontier pollution," International Tax and Public Finance, Springer, vol. 2(2), pages 279-293, August.
  5. den Elzen, Michel G. J. & de Moor, Andre P. G., 2002. "Analyzing the Kyoto Protocol under the Marrakesh Accords: economic efficiency and environmental effectiveness," Ecological Economics, Elsevier, vol. 43(2-3), pages 141-158, December.
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