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US participation, permit allocation, and hot air supply

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  • Klepper, Gernot
  • Peterson, Sonja

Abstract

After Bonn and Marrakech it is likely that emission trading will be realized in the near future. Major influences on the permit market are the institutional details, the participation structure and the treatment of hot air. Different scenarios do not only differ in their implications for the demand and supply of permits and thus the permit price, but also in their allocative effects. Most repercussions can be expected to stem from the effects on the world markets for fossil fuel and especially the oil market. For example the withdrawal of the USA from the Kyoto Protocol and the allocation mechanism for the hot air in Russia, Ukraine and Eastern Europe influence the level of energy demand and gross and net energy prices which in turn change the production structure of energy intensive goods and influence welfare depending on whether a country is an energy net exporter or importer. In this paper we discuss different institutional designs for hot air trading combined with the US withdrawal and quantify the effects by using a computable general equilibrium model. Besides detailed results for the analyzed scenarios, two major findings are relevant for future studies on emission trading: First, marginal abatement cost curves are not as stable as presumed up to now. Second, we find that indeed the allocative repercussions of a scenario are to a large degree determined by its effects on world energy demand and world energy prices. Both findings imply that partial equilibrium models of permit trading that are based on marginal abatement curves ignore the important interaction between the permit market and the world energy markets.

Suggested Citation

  • Klepper, Gernot & Peterson, Sonja, 2002. "US participation, permit allocation, and hot air supply," Open Access Publications from Kiel Institute for the World Economy 4237, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkie:4237
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    References listed on IDEAS

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    1. Rutherford, Thomas F, 1999. "Applied General Equilibrium Modeling with MPSGE as a GAMS Subsystem: An Overview of the Modeling Framework and Syntax," Computational Economics, Springer;Society for Computational Economics, vol. 14(1-2), pages 1-46, October.
    2. Böhringer, Christoph, 2001. "Climate politics from Kyoto to Bonn: from little to nothing?!?," ZEW Discussion Papers 01-49, ZEW - Leibniz Centre for European Economic Research.
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    4. 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;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 138(4), pages 711-746, December.
    5. Paul M. Bernstein & W. David Montgomery & Thomas F. Rutherford & Gui-Fang Yang, 1999. "Effects of Restrictions on International Permit Trading: The MS-MRT Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 221-256.
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    Cited by:

    1. Klepper, Gernot & Peterson, Sonja & Springer, Katrin, 2003. "DART97: a description of the multi-regional, multi-sectoral trade model for the analysis of climate policies," Kiel Working Papers 1149, Kiel Institute for the World Economy (IfW Kiel).
    2. Deke, Oliver & Peterson, Sonja, 2003. "Integrated climate modelling at the Kiel Institute for World Economics: The DART Model and its applications," Open Access Publications from Kiel Institute for the World Economy 4236, Kiel Institute for the World Economy (IfW Kiel).

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