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GTAP Resource #1681

"Assessing the role of CDM and JI for the European climate strategy and the European Emissions Trading Scheme"
by Klepper, Gernot and Sonja Peterson

One of the major components of the European climate strategy for reaching the European Kyoto targets is the European Emissions Trading Scheme (ETS) for CO2 that covers the major energy and energy-intensive sectors. While the ETS guarantees that the emission targets of the ETS sectors are achieved at minimal costs, the efficiency of the overall climate strategy of the EU respectively the different European Member States depends crucially on the reductions outside the ETS as well. There are broadly three ways to reduce greenhouse gas emissions in the single Member States:

1. Domestic CO2-emission reductions in the ETS sectors.
2.Domestic GHG reductions outside the ETS (in the sectors and gases not covered by the ETS)
3.Emission reductions abroad via CDM and JI.

The third option can be used by firms covered by the ETS, which can convert credits earned via CDM and JI into emission allowances under the ETS, as well as by governments, which want to reduce the domestic pressure to abate emissions. The negative economic effects of the Kyoto commitments can be minimized if the optimal policy mix between these three options is chosen.

The allocation of permits to the ETS is subject of the National Allocation Plans (NAPs), which each member state has to prepare before the beginning of an ETS trading period. For the first trading period from 2005 – 2007, the NAPs are now put in place. In addition, the NAPs as well as some government programs contain information on the planned government purchases of CDM and JI credits. Some NAPs also indicate the targets for the ETS sectors until 2012. Given this information it is possible to derive in which way the different EU member states plan to meet their Kyoto targets by 2012 in terms of domestic reductions within and outside the ETS and in terms of reductions coming from abroad through CDM and JI.

The objective of this paper is to assess the potential effects of CDM and JI on the cost of the European climate strategy and the European emissions trading scheme by using the DART model. The Dynamic Applied Regional Trade (DART) Model is a multi-region, multi-sector recursive dynamic computable general equilibrium model of the world economy designed for the analysis of international climate policies. DART is based on the GTAP5E database and includes CO2 emissions associated with the burning of fossil fuels. For the simulation of the European ETS and the European climate strategy, it is calibrated to an aggregation of 26 regions, including the former EU15 countries, Hungary, Poland and Eastern Europe. In each region or country, the economy is disaggregated into 12 sectors. Four of these sectors participate in the ETS. Although there is no perfect match between the installations subject to the ETS and the sectoral structure of DART, it is sufficiently close for assessing the impact of ETS.

With the help of DART, it is possible to simulate the ETS, the CDM and JI market and the domestic action under different assumptions about the functioning of these three markets. While existing simulation studies are based on hypothetical allowance allocation to the ETS and also ignore the possibility of using CDM and JI credits within the ETS and by European governments, this paper will examine the implications of the current NAPs under different assumptions about the use and availability of CDM and JI credits. In particular, DART is used to simulate a scenario without the use of CDM and JI as well as scenarios with restricted use of CDM and JI according e.g. to current governmental plans and under different assumptions on the transaction cost associated with CDM and JI credits. The simulation results are assessed with respect to welfare effects, cost savings, trade flows of greenhouse gas emission allowances including the flow of CDM and JI credits and allowance prices. They are also compared to an optimal climate strategy that is derived from a scenario with unrestricted use of CDM and JI and zero transaction cost.

One main result is that the relatively generous allocation of allowances to the ETS sectors is sub-optimal given the current plans of making only limited use of CDM and JI on governmental level. Concerning CDM and JI in general, this option can reduce the cost of reaching the Kyoto targets considerably. The degree to which the ETS sectors use CDM and JI credits within the European ETS crucially depends on the assumptions on transaction costs. In most scenarios though, this option can indeed reduce the cost of the ETS for European industry.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2005 Conference Paper
Status: Published
By/In: Presented at the 8th Annual Conference on Global Economic Analysis, Lübeck, Germany
Date: 2005
Version: No 1238
Created: Peterson, S. (4/15/2005)
Updated: Batta, G. (6/21/2005)
Visits: 3,349
No keywords have been specified.

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