Marginal Abatement Cost Curves: Combining Energy System Modelling and Decomposition Analysis

Marginal abatement cost (MAC) curves are a useful policy tool to communicate findings on the technological structure and the economics of CO₂ emissions reduction. However, existing ways of generating MAC curves do not display consistent technological detail and do not consider system-wide interactions and uncertainty in a structured manner. This paper details a new approach to overcome the present shortcomings by using an energy system model, UK MARKAL, in combination with index decomposition analysis. In addition, this approach allows different forms of uncertainty analysis to be used in order to test the robustness of the MAC curve. For illustration purposes, a sensitivity analysis concerning fossil fuel prices is applied to the transport sector of the UK. The resulting MAC curves are found to be relatively robust to different fuel costs at higher CO₂ tax levels. The new systems-based approach improves MAC curves through the avoidance of an inconsistent emissions baseline, the incorporation of system-wide interactions and the price responsiveness of demand.     

Time-Frequency Analysis of the Relationship Between EUA and CER Carbon Markets

In this paper, interactions or co-movement between the CER and EUA futures prices are examined in order to shed light on the dependency between the European Union Emissions Trading Scheme (EU ETS) and the clean development mechanism (MDP). Our analysis uses the wavelet method to model the correlation between CER and EUA in the time-frequency domain. It highlights the impact of different investors (according to their investment horizons) on the co-movement between the CER and EUA prices, and therefore, the behavior of individual investors as speculators, arbitrageurs, and hedgers on European allowance and CDM credits cumulatively. In this vein, we analyze according to the frequency intervals, price convergence, identification of potential factors that could explain a difference in futures prices, and structural changes in the EUA and CER prices. The application is made using daily EUA’s and CER’s prices data.     

Measuring the Welfare Cost of Climate Change Policies: A Comparative Assessment Based on the Computable General Equilibrium Model GEMINI-E3

Measuring the welfare cost of climate change policies is a real challenge, raising difficult issues of micro- and macro-economics: cost-benefit analysis on the one hand, foreign trade and international specialization on the second hand. At the domestic level the possible existence of distortions, in particular in the fiscal system, may either increase or alleviate the welfare cost of a climate change policy, as illustrated by the debate on double dividend. Effects on the prices in international markets and distorted competition between countries committed to abate (Annex B) and uncommitted countries affect both the sharing of the burden, in particular through the change in the terms of trade, and the allocation of activities with the frequently waved threat of delocalization. Based on a companion theoretical analysis, the present paper aims at putting order in the welfare analysis of climate change policy and to present and compare various estimations, issuing from macro- or computable general equilibrium models. Beside the global welfare cost, the paper focuses on the marginal abatement cost and its relation to the carbon price.Most present conceptual and applied analysis is based on the case of a single domestic household-consumer. Taking into account several consumers raises new challenges, concerning equity but even more fundamentally the mere definition of fiscal distortion, which have not yet been really addressed.     

Global Warming, Uncertainty and Endogenous Technical Change

What impact does ecological uncertainty have on agents' decisions concerning domestic emissions abatement, physical investments, and R&;D expenditures? How sensitive are the answers to these questions when we move from exogenous to endogenous technical change? To investigate these issues we modify the ETC-RICE model described in Buonanno et al. (2001) by embedding in it a hazard rate function as in Bosello and Moretto (1999). With this model at hand we run numerical optimisations focusing our attention on the control variables of the representative agents, i.e., domestic abatement rate, investments in physical capital, and R&;D spending, as well as on the endogenous patterns of GDP level and CO₂ emissions. Our results show that uncertainty strongly influences agents behaviour; in particular, agents slow down their emissions in order to maintain a more sustainable growth path. In addition, R&;D expenditures trigger the “engine of growth” exclusively when environmental technical change is formalized in an endogenous fashion. However, even if environmental uncertainty may stimulate technical change, long-run growth it turns out to be negatively affected by the former, as also predicted by Clarke and Reed (1994) Tsur and Zemel (1996) and Bosello and Moretto (1999).     

The Role of Abatement Costs in GHG Permit Allocations: A Global Stabilization Scenario Analysis

Our objective is to propose permit allocation schemes that lead to a fair distribution of the net abatement cost among regions in a global greenhouse gas (GHG) stabilization scenario. We use a detailed technology-based energy model, World-MARKAL, to determine efficient abatement decisions, and to calculate the regional gross abatement costs (before permit allocation and trading). The net abatement costs are then calculated and used for different permit allocation schemes.     

Optimal Environmental Policy for a Polluting Monopoly with Abatement Costs: Taxes Versus Standards

In this paper, we characterize the optimal environmental policy for a polluting monopoly that devotes resources to abatement activities when damages are caused by a stock pollutant. With this aim, we calculate the stagewise feedback Stackelberg equilibrium of a (differential) policy game where the regulator is the leader and the monopolist is the follower. Our analysis shows that the first-best policy consists of applying a Pigouvian tax and a subsidy on production equal to the difference between the price and the marginal revenue. However, for a stock pollutant, the Pigouvian tax is not equal to the marginal damages but is given by the difference between the social and private valuation of the pollution stock. On the other hand, if a second-best emission tax is used, the tax is lower than the Pigouvian tax and the difference decreases with the price elasticity of the demand. Finally, we find that taxes and standards are equivalent in a second-best setting. In the second part of the paper, we solve a linear-quadratic differential game and we obtain that the first-best tax increases with the pollution stock whereas the subsidy decreases. Moreover, the tax is negative for low values of the pollution stock, i.e., for low values of the pollution stock, we obtain that the social valuation of the stock is lower than the private valuation. Furthermore, when a second-best policy is applied, the steady-state pollution stock is lower than the steady-state pollution stock associated with the efficient outcome.     

Mitigation Portfolio and Policy Instruments When Hedging Against Climate Policy and Technology Uncertainty

In this paper, we use a stochastic integrated assessment model to evaluate the effects of uncertainty about future carbon taxes and the costs of low-carbon power technologies. We assess the implications of such ambiguity on the mitigation portfolio under a variety of assumptions and evaluate the role of emission performance standards and renewable portfolios in accompanying a market-based climate policy. Results suggest that climate policy and technology uncertainties are important with varying effects on all abatement options. The effect varies with the technology, the type of uncertainty, and the level of risk. We show that carbon price uncertainty does not substantially change the level of abatement, but it does have an influence on the mitigation portfolio, reducing in particular energy R&D investments in advanced technologies. When investment costs are uncertain, investments are discouraged, especially during the early stages, but the effect is mitigated for the technologies with technological learning prospects. Overall, these insights support some level of regulation to encourage investments in coal equipped with carbon capture and storage and clean energy R&D.     

Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Marginal abatement cost (MAC) curves, relationships between tonnes of emissions abated and the CO₂ (or greenhouse gas (GHG)) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced-form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) Are MAC relationships independent of what happens in other regions?, (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from MACs? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO₂-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. We also show that, as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated.     

Near term mitigation policy for global change under uncertainty: Minimizing the expected cost of meeting unknown concentration thresholds

An aggregate integrated assessment model is used to investigate the relative merits of hedging over the near term against the chance that atmospheric concentrations of carbon dioxide will be limited as a matter of global policy. Hedging strategies are evaluated given near term uncertainty about the targeted level of limited concentrationsand the trajectory of future carbon emissions. All uncertainty is resolved in the year 2020, and strategies that minimize the expected discounted value of the long term cost of abatement, including the extra cost of adjusting downstream to meet unexpected concentration limits along unanticipated emission trajectories, are identified. Even with uncertainties that span current wisdom on emission futures and restriction thresholds that run from 550 ppm through 850 ppm, the results offer support for at most modest abatement response over the next several decades to the threat of global change.     

Assessing the Impact of Carbon Tax Differentiation in the European Union

To what extent do the welfare costs associated with the implementation of the Burden Sharing Agreement in the European Union depend on sectoral allocation of emissions rights? What are the prospects for strategic climate policy to favor domestic production? This paper attempts to answer those questions using a CGE model featuring a detailed representation of the European economies. First, numerical simulations show that equalizing marginal abatement costs across domestic sectors greatly reduces the burden of the emissions constraint but also that other allocations may be preferable for some countries because of pre-existing tax distortions. Second, we show that the effect of a single country's attempt to undertake a strategic policy to limit impacts on its domestic energy-intensive industries has mixed effects. Exempting energy-intensive industries from the reduction program is a costly solution to maintain the international competitiveness of these industries; a tax-cum-subsidy approach is shown to be better than exemption policy to sustain exports. The welfare impact either policy – exemption or subsidy – on other European countries is likely to be small because of general equilibrium effects.     

The FAIR model: A tool to analyse environmental and costs implications of regimes of future commitments

This article describes the policy decision-support tool, FAIR, to assess the environmental and abatement costs implications of international regimes for differentiation of future commitments. The model links long-term climate targets and global reduction objectives with regional emission allowances and abatement costs, accounting for the Kyoto Mechanisms used. FAIR consists of three sub-models: a simple climate model, an emission-allocation model and a cost model. The article also analyses ten different rule-based emission allocation schemes for two long-term concentration stabilisation targets for greenhouse gases. This analysis shows that evaluating regimes requires not only an assessment of the initial allocation, but also of the distribution of abatement costs and the impacts from emissions trading. The Multi-Stage approach (with a gradual increase of Parties adopting emission intensity or reductions targets) and the Triptych approach (with sectoral targets for all Parties) seem to provide the best prospects for most of the Parties when compared to the other allocation schemes analysed.     

Comparative assessment of essential and heavy metals in fruits from different geographical origins

The aim of this investigation was to estimate and compare essential and heavy metals contents in 98 commercially available fresh fruits from different geographic regions using multivariate techniques. The concentrations of 12 elements (calcium, magnesium, potassium, sodium, phophorus, cobalt (Co), manganese, iron, chromium (Cr), nickel (Ni), zinc and copper) were determined using flame atomic absorption spectrometry with deuterium-background correction. Phosphorus was determined in the form of phosphomolybdate by a spectrophotometric method. Reliability of the procedure was checked by analysis of the certified reference materials tea (NCS DC 73351), cabbage (IAEA-359) and spinach leaves (NIST-1570). Recoveries of the elements analysed varied between 85.5 and 103 %, and precisions for the reference materials were 0.13–6.08 %. Based on recommended dietary allowance and adequate intake estimated for essential elements, it was concluded that accessory fruits such as pineapples, raspberries and strawberries supply organism with the highest amounts of bioelements. Although accessory fruits were also found to be the greatest source of Ni among all the analysed fruits, in all the fruits Ni was more abundant than Cr and Co. Significant correlation coefficients (p?<?0.001, p?<?0.01 and p?<?0.05) were found between concentrations of some metals in fresh fruits. Application of ANOVA Kruskal–Wallis test and multivariate techniques such as factor analysis and cluster analysis enabled us to differentiate particular botanical families and types of fruits.     

Non-linear Pass-Through of the CO2 Emission-Allowance Price onto Wholesale Electricity Prices

This article considers the evidence for threshold effects in the relationship between electricity and emission-permit prices in France and Germany during the second phase of the EU ETS. Specifically, we compare linear and non-linear threshold models of electricity prices using the sample-splitting and threshold estimation approach in Hansen (Econometrica, 64 575–603 2000). We find evidence of non-linear threshold effects in both countries. The estimated carbon-price thresholds are 14.94€ and 12.57€ in France and Germany respectively. The carbon-price threshold in France perfectly matches the well-known carbon spot-price structural break of October 2008. This is not the case for the carbon-price threshold in Germany. Further analysis reveals that carbon prices before October 2008 were not reflected in electricity prices in either country. This is mainly due to uncertainty about the future of the EU ETS that led electricity producers to adopt a wait-and-see attitude. After October 2008, French electricity producers passed the price of emission permits through to electricity prices in a linear way, while their German counterparts did so non-linearly. Finally, we suggest improvements to the design of the EU ETS. Our recommendations are to strengthen the price signal to make it more clear and reliable and provide sufficient incentives for energy transition.     

Discharge permit market and farm management nexus: an approach for eutrophication control in small basins with low-income farmers

The economic concerns of low-income farmers are barriers to nutrient abatement policies for eutrophication control in surface waters. This study brings up a perspective that focuses on integrating multiple-pollutant discharge permit markets with farm management practices. This aims to identify a more economically motivated waste load allocation (WLA) for non-point sources (NPS). For this purpose, we chose the small basin of Zrebar Lake in western Iran and used the soil and water assessment tool (SWAT) for modeling. The export coefficients (ECs), effectiveness of best management practices (BMPs), and crop yields were calculated by using this software. These variables show that low-income farmers can hardly afford to invest in BMPs in a typical WLA. Conversely, a discharge permit market presents a more cost-effective solution. This method saves 64% in total abatement costs and motivates farmers by offering economic benefits. A market analysis revealed that nitrogen permits mostly cover the trades with the optimal price ranging from $6 to $30 per kilogram. However, phosphorous permits are limited for trading, and their price exceeds $60 per kilogram. This approach also emphasizes the establishment of a regional institution for market monitoring, dynamic pricing, fair fund reallocation, giving information to participants, and ensuring their income. By these sets of strategies, a WLA on the brink of failure can turn into a cost-effective and sustainable policy for eutrophication control in small basins.     

Understanding the Price Dynamics in the Jiangsu SO2 Emissions Trading Program in China: A Multiple Periods Analysis

Because emissions permits can be considered to be a pseudo-commodity, the permit price in the emissions trading markets has already attracted great interest from the economic literature. This research took the Jiangsu sulfur dioxide (SO₂) emissions trading program in China as a case study to examine the price dynamics over the next 10 years (2011–2020) based on Jiangsu’s new SO₂ emissions trading policy design. An adaptive agent-based simulation model was developed to estimate the price dynamics as well as the impact of energy price, policy design, and new environmental regulation on the permit price. The results showed that the equilibrium price of the Jiangsu SO₂ emissions trading market is approximately 4.20 CNY/kg, and the permit price will fluctuate around this price if the other conditions are not changed. If the coal price increases during 2011–2016, the permit price will decline to 2.79 CNY/kg by 2020 under China’s current coal–electricity price mechanism. In addition, the banking mechanism will smooth the price fluctuations and the average permit price will be generally higher when banking is not allowed. Finally, the stricter environmental regulation will reduce the market supply of permits and will raise the permit price. According to China’s potential new SO₂ discharge standard, the permit price will jump to 11 CNY/kg. The quantification of the permit price dynamics can help power plants to make decisions on emissions trading.     

Improve Compliance with Limited Resources by a Three-Group Inspection Regime

Frequent monitoring and relatively high fines are usually necessary to bring about improvements in environmental quality, but more challenging for many countries with limited human, material, and financial resources is to put them into practice. This paper developed a three-group model of a state-dependent enforcement in a repeated game to improve the policy implementation under limited inspection capacities. A certain number of firms are grouped (group 1, group 2, group 3) for different supervision intensity (e.g., the order of inspection probability corresponding to each group is p ₁?<?p ₂?<?p ₃) based on their environmental performance. The optimal policy parameters, such as inspection probability of each group and the probability that a firm found in compliance is moved to a better reputation group, were obtained as the basis for regulator’s policy making. Numerical simulations indicated that the three-group inspection regime can significantly increase compliance rate as compared with static enforcement with the same monitoring probability. Among the number of firms in each group under steady state conditions, group 2 had the most, group 1 was the second, and group 3 had the smallest. Analysis and prediction of a three-group reputation example provided a good experiment for the model. The results give a practical reference for the policy makers with inspection capacity constraints to achieve higher compliance rate.     

Modeling a Carbon Capture,Transport, and Storage Infrastructure for Europe

In this paper, we develop a model to analyze the economics of carbon capture, transport, and storage (CCTS) in the wake of expected rising CO₂ prices. We present a scalable mixed integer, multiperiod, welfare-optimizing network model for Europe, called CCTS-Mod. The model incorporates endogenous decisions on carbon capture, pipeline and storage investments, as well as capture, flow and injection quantities based on given costs, CO₂ prices, storage capacities, and point source emissions. Given full information about future costs of CCTS-technology, and CO₂ prices, the model determines a cost minimizing strategy on whether to purchase CO₂ certificates, or to abate the CO₂ through investments into a CCTS-chain on a site by site basis. We apply the model to analyze different scenarios for the deployment of CCTS in Europe, e.g., under high and low CO₂ prices, respectively. We find that beyond CO₂ prices of €50 per t, CCTS can contribute to the decarbonization of Europe’s industry sectors, as long as one assumes sufficient storage capacities (onshore and/or offshore). We find that CCTS is only viable for the power sector if the CO₂ certificate price exceeds €75 per t.     

Marine Reserve Design with Ocean Currents and Multiple Objectives

There is a growing tendency to consider marine reserves as a management and conservation tool. We investigate a spatial bio-economic model to determine fishery profits under conservation efforts. Rather than imposing a marine reserve on our model, we ask, “When and where should a marine reserve be implemented ?” For one-dimensional habitat, we determine conditions under which marine reserves emerge as a part of the optimal policy. Depending upon the size of the habitat, the optimal strategy is either to avoid fishing or to fish at maximum rate. The effect of ocean currents is analyzed through numerical simulations. We find that in the presence of strong currents, a marine reserve may become ineffective. If the currents are at low rate, a marine reserve could emerge as a variable management tool.     

A Stochastic Dynamic Game of Carbon Emissions Trading

This paper proposes a computable stochastic equilibrium model to represent the possible competition between Russia and China on the international market of carbon emissions permits. The model includes a representation of the uncertainty concerning the date of entry of developing countries (e.g., China) on this market in the form of an event tree. Assuming that this date of entry is an uncontrolled event, we model the competition as a dynamic game played on an event tree and we look for a solution called S-adapted equilibrium. We compare the solution obtained from realistic data describing the demand curves for permits and the marginal abatement cost curves in different countries, under different market and information structures: (i) Russia's monopoly, (ii) Russia–China competition in a deterministic framework, (iii) Russia–China competition in a stochastic framework. The results show the possible impact of this competition on the pricing of emissions permits and on the effectiveness of Kyoto and post-Kyoto agreements, without a US participation.     

Integrating Land Market Feedbacks into Conservation Planning—A Mathematical Programming Approach

Nature reserves are often designated ad hoc. Despite increasing conservation efforts, loss of biodiversity is still accelerating. Considering land scarcity and demand for alternative uses, efficiency in conservation strongly correlates with efficiency in land allocation. Systematic conservation planning can effectively prioritize conservation activities. Previous studies minimize opportunity costs for given conservation targets. However, these studies assume constant marginal costs of habitat protection. We extend this cost minimization approach by also considering a dynamic representation of marginal costs. The more land is allocated to nature reserves, the higher are opportunity costs, i.e., costs of forgone agricultural production. This increase in costs results from changes in the prices of agricultural commodities. We employ a deterministic, spatially explicit mathematical optimization model to allocate species habitats by minimizing opportunity costs for setting aside land for conservation purposes. The model is designed as a mixed integer programming problem and solved with GAMS/CPLEX. Our results show the need for integrating land market feedbacks into conservation planning. We find that ignoring land rent adjustments can lead to highly cost-ineffective solutions in reserve selection.