1. Emission trading and uncertainty Paweł Bartoszczuk Systems Research Institute, PAS, Poland bartosz@ibspan.waw.pl

2. 2 Outline The idea of emission trading Uncertainty in trading Optimisation problem Scenarios and results Conclusion

3. 3 MAC’s for 2 regions (example) p1p1 p3p3 k D CB A MAC 1 MAC 2 Marginal cost of abatement Carbon abated region 1 p2p2 Carbon abated region 2 h tr E

4. 4 Analysed regions (Annex B) 1.USA 2.Japan (JPN) 3.European Community 12 (as 1992) (EEC) 4.Other OECD (OOE) 5.Eastern Europe (EET) 6.Former Soviet Union (FSU)

5. 5 Necessary abatement

6. 6 How to calculate the marginal and total costs Marginal cost of abatement P=aQ 2 +bQ, Total costs C=0.33aQ 3 +0.5bQ 2. Coeficients a, b were taken from Ellerman paper MIT (1998)

7. 7 Optimisation problem (1) i=1,...6 are Kyoto Annex B regions; a i = emission at „i” ( Mton ) in 2010 if no abatement. x i = emission at source i in Mton after trade ; c i = the total costs of abatement from a i to x i,

8. 8 Optimisation problem (2) alfa =the risk of not satisfying the Kyoto target due to uncertainty d i =relative uncertainty of the source i, K i = the Kyoto target for country i, n i = base year emission at source i in Mton (1990), y i= the number of emission permits acquired by source i (y i is negative if region i is a net supplier of permits)

9. 9 Relative uncertainty of the region i USA 0,15 JPN 0,1 EEC 0,2 OOE 0,17 EET 0,3 FSU 0,3 Simulating the Carbon Permit Market with Imperfect Observations of Emissions: Approaching Equilibrium through Sequential Bilateral Trade Odd Godal

10. 10 Abatement, a=0.5 no uncertainty permits price 128 $/ton Reduction, permits exp/imp- (Mton)

11. 11 Cost of abatement and permits, a=0.5, no uncertainty

12. 12 Results, a=0, uncertainty fully accounted for permits price 360 $/ton Reduction, permits exp/imp- (Mton) USA sells !

13. 13 Results, a=0, uncertainty fully accounted for

14. 14 Results, a=0.33, uncertainty partly accounted for permit price 190 $/ton Reduction, permits exp/imp- (Mton) FSU-hot air 34 Mton

15. 15 Results, a=0.33, uncertainty partly accounted for

16. 16 Gain from trading

17. 17 How far marginal costs from market price? Difference between marginal costs and permit price

18. 18 Conclusion Trading effect: cost reductions Regions whose marginal cost is further from the trading equilibrium will benefit more than those whose cost is closer The greatest benefits obtains FSU, that is the biggest exporter of permits, and Japan that imports more than 60% of its Kyoto commitment. When a=0, most regions gain from trading