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

2 ZEW Workpackage leader: Workpackage participants: Ecoplan CCAP ECN NTE Objectives  Develop macroeconomic model (computable general equilibrium – CGE) of international trade and energy use featuring the EU ETS in 2010  Integrate project-based JI and CDM within top- down CGE framework accounting for  Transaction costs  CDM-specific investment risks  Technology transfer  Quantitative assessment of economic and emission impacts triggered by climate policies

3 Model inputs  GTAP 6 database, EU and DOE energy projections to 2010  EU-27 allowance allocation: NAP II  Project-based CDM cost and potential (work package 2 and 3)  Project-based transaction costs (work package 3)  Premium on CER price  Upward shift of CDM supply curve  Composite investment risk indicator (work package 1)  Risk premium on CER price  Upward shift of CDM supply curve: risk lowers expected return of CDM projects

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

5 General Equilibrium Model: PACE –Multi-sector, multi-region model of the global economy –Incorporation of market interactions and income closures –Calibration of technologies and preferences based on empirical data PACE (Policy Assessment based on Computable Equilibrium):

Model regions EU-27 Member States Rest of ratifying Annex B parties Russian Federation Rest of Former Soviet Union Japan Canada CDM host countries China incl. Hong Kong India Rest of East South Asia Brazil Central + South America South Africa

Climate policy scenarios ScenarioRegulatory scheme CDM access Transaction costs Investment risk ET Emissions tradingNo ET_CDM Emissions tradingYesNo ET_CDM_TC_R Emissions tradingYes  No Hot Air (No „Hot Air“ supply from FSU)  Additionality (Restricted CDM projects)  Supplementarity (Limit on CER imports) Permit supply and demand restrictions: Key: ET – emissions trading, TC – transaction costs, R – investment risk Additional scenario dimensions: Central scenario dimensions:

International CO 2 permit price (US$/t CO 2 ) Key: HA – hot air, Add – additionality

max=1.44 min= % quantile = 0.89 US$/tCO 2 90% quantile = 1.32 US$/tCO 2 Median = 0.98 Mean = Sensitivity analysis for CO 2 permit price Technique: Monte-Carlo simulations on key elasticities Illustration: Scenario ET_CDM_TC_R without hot air  CO 2 price = 0.98 US$/tCO 2 )

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

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

12 Implementation of projects  Implementation of CDM projects based on numerical simulation results  Procedure (linkage of model and CDM database): 1.Simulation of CO 2 permit prices for alternative policy scenarios 2.Derivation of marginal abatement cost levels on the project-based CDM supply curves (CDM database) 3.Identification of implemented projects (number / volume) within the CDM database

Implemented CDM projects (volume share by region) No CDM restrictionAdditionality CDM Potential

14 Conclusions (1)  Low permit price and small macroeconomic impacts due to large potentials of cheap CDM permit supply  Given prices for CER futures: Hidden costs of CDM investments?  Transaction costs and investment risk increase permit price, but limited impact on the macroeconomy based on underlying CDM data  Large impact of Additionality criterion, Supplementarity rule and restriction of “Hot-Air” on permit price and adjustment costs

15 Conclusions (2)  China, Central+South America and Rest of East South Asia as dominant CDM host regions. Sectoral distribution dominated by Electricity, Agricultural Products and Public Sector  Additionality criterion decreases number volume and distribution of CDM projects significantly  exclusion of “No-Regret” options  Transaction costs and investment risk deter implementing CDM projects, and change project portfolio in favor of “large-scale” options

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