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CO2 abatement costs and permits price : Exploring the impact of banking and the role of future commitments

  • VAN STEENBERGHE, Vincent

Since the signing of the Kyoto Protocol in December 1997, several authors have computed the costs of reducing greenhouse gas emissions by the amount specified in the Protocol, while accounting for the possibility to use the flexible mechanisms of the Protocol (internationally tradable emission permits). A number of such studies have recently shown that, following the US withdrawal and the Bonn and Marrakesh agreements, these abatement costs will be very low and the price of the permits could reach zero. However, these analyses usually take only the first commitment period (20082012) into account and do not explicitly consider the possibility of banking permits from one commitment period to the other (Art. 3.13 of the Protocol). The simple dynamic model that we develop here introduces this possibility. It allows one to analyze the impact of alternative future commitments (post 2012) for the US and the non-Annex B countries on world emissions, abatement costs and the permits price. We find that, provided ambituous post-Kyoto commitments are negotiated: (i) in 2008-2012, the amount of banked permits will largely exceed the amount of hot air and permits prices will be much higher than predicted by most other studies, (ii) the banking provision significantly reduces world total costs but increases total costs for all permit-importing Annex B countries (i.e. all Annex B countries except countries of eastern Europe) via a rise in the permits price in 2008-2017 and (iii) the issue of market power on hot air is not likely to be a relevant one.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003098.

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Date of creation: 00 Dec 2003
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Handle: RePEc:cor:louvco:2003098
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  1. Laurent Viguier & Michel Trommetter & Patrick Criqui & Odile Blanchard, 2000. "Au-delà de Kyoto : enjeux d'équité et d'efficacité dans la négociation sur le changement climatique," Économie et Prévision, Programme National Persée, vol. 143(2), pages 15-35.
  2. Eyckmans Johan & van Steenberghe Vincent & Van Regemorter Denise, . "Is Kyoto Fatally Flawed? An Analysis with MacGEM," EcoMod2002 330800025, EcoMod.
  3. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers 1479, Iowa State University, Department of Economics.
  4. Hagem, Cathrine & Westskog, Hege, 1998. "The Design of a Dynamic Tradeable Quota System under Market Imperfections," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 89-107, July.
  5. Ghersi, Frederic & Hourcade, Jean-Charles, 2001. "The Economics of a Lost Deal," Discussion Papers dp-01-48-, Resources For the Future.
  6. Böhringer, Christoph, 2001. "Climate politics from Kyoto to Bonn: from little to nothing?!?," ZEW Discussion Papers 01-49, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Adam Rose & Brandt Stevens & Jae Edmonds & Marshall Wise, 1998. "International Equity and Differentiation in Global Warming Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(1), pages 25-51, July.
  8. Edmonds, Jae & Wise, Marshall & Barns, David W, 1995. "Carbon coalitions : The cost and effectiveness of energy agreements to alter trajectories of atmospheric carbon dioxide emissions," Energy Policy, Elsevier, vol. 23(4-5), pages 309-335.
  9. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
  10. Andreas Löschel & Zhong Zhang, 2002. "The economic and environmental implications of the US repudiation of the kyoto protocol and the subsequent deals in Bonn and Marrakech," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 138(4), pages 711-746, December.
  11. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  12. Toman, Michael & Shogren, Jason, 2000. "Climate Change Policy," Discussion Papers dp-00-22, Resources For the Future.
  13. Kverndokk, S., 1992. "Tradeable CO2 Emission Permits: Initial Distribution as a Justice Problem," Memorandum 23/1992, Oslo University, Department of Economics.
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