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Carbon Trading with Imperfectly Observable Emissions

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  • Odd Godal
  • Yuri Ermoliev
  • Ger Klaassen
  • Michael Obersteiner

Abstract

The Kyoto Protocol foresees emission trading but does not yet specify verification of (uncertain) emissions. This paper analyses a setting in which parties can meet their emission targets by reducing emissions, by investing in monitoring (reducing uncertainty of emissions) or by (bilaterally) trading permits. We derive the optimality conditions and carry out various numerical simulations. Our applications suggest that including uncertainty could increase compliance costs for the USA, Japan and the European Union. Central Europe and the Former Soviet Union might be able to gain from trading due to higher permit prices. Emissions trading could also lower aggregate uncertainty on emissions. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Odd Godal & Yuri Ermoliev & Ger Klaassen & Michael Obersteiner, 2003. "Carbon Trading with Imperfectly Observable Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 25(2), pages 151-169, June.
    • Handle: RePEc:kap:enreec:v:25:y:2003:i:2:p:151-169
    DOI: 10.1023/A:1023914324084
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    References listed on IDEAS

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    6. Farrell, Alex & Carter, Robert & Raufer, Roger, 1999. "The NOx Budget: market-based control of tropospheric ozone in the northeastern United States," Resource and Energy Economics, Elsevier, vol. 21(2), pages 103-124, May.
    7. Y. Ermoliev & M. Michalevich & A. Nentjes, 2000. "Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 15(1), pages 39-56, January.
    8. M. Jonas & S. Nilsson & M. Obersteiner & M. Gluck & Y.M. Ermoliev, 1999. "Verification Times Underlying the Kyoto Protocol: Global Benchmark Calculations," Working Papers ir99062, International Institute for Applied Systems Analysis.
    9. Ger Klaassen & Andries Nentjes, 1997. "Creating Markets for Air Pollution Control in Europe and the USA," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(2), pages 125-146, September.
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    Cited by:

    1. T. Ermolieva & Y. Ermoliev & M. Jonas & M. Obersteiner & F. Wagner & W. Winiwarter, 2014. "Uncertainty, cost-effectiveness and environmental safety of robust carbon trading: integrated approach," Climatic Change, Springer, vol. 124(3), pages 633-646, June.
    2. Olgierd Hryniewicz & Zbigniew Nahorski & Jörg Verstraete & Joanna Horabik & Matthias Jonas, 2014. "Compliance for uncertain inventories via probabilistic/fuzzy comparison of alternatives," Climatic Change, Springer, vol. 124(3), pages 519-534, June.

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