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.     

On the optimal control of carbon dioxide emissions: an application of FUND

This paper presents the Climate Framework for Uncertainty, Negotiation and Distribution (FUND), an integrated assessment model of climate change, and discusses selected results. FUND is a nine‐region model of the world economy and its interactions with climate, running in time steps of one year from 1990 to 2200. The model consists of scenarios for economy and population, which are perturbed by climate change and greenhouse gas emission reduction policy. Each region optimizes its net present welfare. Policy variables are energy and carbon efficiency improvement, and sequestering carbon dioxide in forests. It is found that reducing conventional air pollution is a major reason to abate carbon dioxide emissions. Climate change is an additional reason to abate emissions. Reducing and changing energy use is preferred as an option over sequestering carbon. Under non‐cooperation, free riding as well as assurance behaviour is observed in the model. The scope for joint implementation is limited. Under cooperation, optimal emission abatement is (slightly) higher than under non‐cooperation, but the global coalition is not self‐enforcing while side payments are insufficient. Optimal emission control under non‐cooperation is less than currently discussed under the Framework Convention on Climate Change, but higher than observed in practice. This revised version was published online in July 2006 with corrections to the Cover Date.     

Examining the uncertainty of carbon emission changes: A systematic approach based on peak simulation and resilience assessment

Efforts to achieve carbon peak is one of the Chinese government's commitments, but the diversity of future development paths leads to the uncertainty of carbon emissions. Based on the carbon peak simulation, this study develops a framework to assess the carbon emission uncertainty, aiming to explore the potential low-carbon paths. The STIRPAT model is firstly introduced to explore the influence of population, economic and technology factors on carbon emissions, which is followed by emission peaks simulation. The resilience theory is then introduced to define the concept of low-carbon resilience (LCR), which refers to the ability to maintain a low level of carbon emissions. The uncertainty of carbon emission changes between different scenarios is identified by considering peaking time, cumulative increase and mitigation process. This study taking 10 Chinese coastal provinces as an example, and results show that all provinces can achieve the target of carbon emission peak in low-emissions scenario, the cumulative growth of carbon emissions is low and can be mitigated over a relatively short term, showing a strong LCR. In high-emissions scenario, Liaoning, Tianjin, Fujian and Guangxi may not have a peak before 2050, the uncertainty of carbon emission changes is relatively high, while Hebei, Jiangsu, Shanghai and Guangdong show relatively low uncertainty for the clear peaking time. The study also designs intermediate scenario to reduce the uncertainty of carbon emission changes to provide reference for each province's emission reduction path. These findings help to understand carbon uncertainty to reduce the risk of increasing cumulative emissions under the scenario of only focusing on peaking times, and provide a basis for future carbon resilience and sustainable emission reduction policies.     

What matters in the distributions of clean development mechanism projects? A panel data approach

The Clean Development Mechanism (CDM) suggests that both developed and developing countries can take actions to mitigate global climate change. Carbon reduction and sustainable development are the goals of the CDM. However, the uneven distribution of the CDM projects in developing countries may jeopardize the fulfilment of these goals. This paper uses panel data from 107 host countries to explore the influencing factors of the CDM using a negative binomial regression. The club convergence model is used to divide the host countries into different sub-groups according to their numbers of operating CDM projects in a year. The results show that affluence, the sophisticated international trading experience, and the growing demands for energy of the host countries have a positive impact on the successful registrations of the CDM projects, while the cost of carbon emission abatement hinders the registration. But for countries with fewer CDM projects, the industrial level and national carbon emission have no significant impacts on the distribution of CDM projects. In the end, target policy implications were made based on the results.     

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.     

Approaches to standardization of atmospheric pollution undergoing long-range and transboundary transport

The authors consider some possible ways of regulating three types of atmospheric emission of pollutants:

1. emission of substances causing pollution of the natural environment on the global scale (global pollutants);
2. emission of substances causing pollution on a regional scale, most often including territories of several countries (international pollutants);
3. emission of substances causing negative effects in a relatively limited region, for example within border area of two adjoining countries.

Substances (gaseous, as a rule) of a long life-time in the atmosphere that can contaminate natural media on a global scale irrespective of the place of emission refer to the first class of pollutants that are subject to emission regulation at an international level and to quota establishement for individual countries. They are carbon dioxide, freon, krypton-85. Various approaches to determining permissible emission and to quota establishing are discussed in the paper. The second group includes substances of a limited, yet rather long, life-time whose emission intensity makes a notable contribution to environmental pollution of a large region including territories of several countries. Here it is needed to regulate internationally not the atmospheric emission as it is but pollutant transport over national boundaries (sulphur and nitrogen oxides, pesticides, heavy metals). The third group includes substances of relatively short time of life producing local effects. Emission regulation in such cases should be based upon bilateral agreements with due account of countries' mutual interests.     

Correcting the carbon cycle representation: How important is it for the economics of climate change?

Economic analyses of the greenhouse effect are typically carried out within the framework of computable general equilibrium models which represent the climate system by simple two box proxies based upon the pioneering work of Nordhaus. Since errors in predicting the carbon budget can imply high costs, there is some need to include more sophisticated climate models into the economics of global climate change. This paper presents a non-linear pulse representation of the process-based and data-validated Bern carbon model. Compared to the Nordhaus approach this leads to different results with respect to optimal climate policy and atmospheric carbon dioxide concentration. In particular, our results suggest that economic studies which use a Nordhaus representation of the climate system are biased towards high carbon emission and low abatement levels.     

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.     

Sequential climate decisions under uncertainty: An integrated framework

We develop an integrated framework for evaluating sequential greenhouse gas abatement policies under uncertainty. The analysis integrates information concerning the magnitude, timing, and impacts of climate change with data on the likely effectiveness and cost of possible response options. Reduced-scale representations of the global climate system, drawn from the MIT Integrated Global System Model, form the empirical basis of the analysis. The method is illustrated in application to emissions control policies of the form considered under the United Nations Framework Convention on Climate Change.     

Aircraft mass budgeting to measure CO2 emissions of Rome,Italy

Aircraft measurements were used to estimate the CO₂ emission rates of the city of Rome, assessed against high-resolution inventorial data. Three experimental flights were made, composed of vertical soundings to measure Planetary Boundary Layer (PBL) properties, and circular horizontal transects at various altitudes around the city area. City level emissions and associated uncertainties were computed by means of mass budgeting techniques, obtaining a positive net CO₂ flux of 14.7?±?4.5, 2.5?±?1.2, and 10.3?±?1.2 μmol m^?2 s^?1 for the three flights. Inventorial CO₂ fluxes at the time of flights were computed by means of spatial and temporal disaggregation of the gross emission inventory, at 10.9?±?2.5, 9.6?±?1.3, and 17.4?±?9.6 μmol m^?2 s^?1. The largest differences between the two dataset are associated with a greater variability of wind speed and direction in the boundary layer during measurements. Uncertainty partitioned into components related to horizontal boundary flows and top surface flow, revealed that the latter dominates total uncertainty in the presence of a wide variability of CO₂ concentration in the free troposphere (up to 7 ppm), while it is a minor term with uniform tropospheric concentrations in the study area (within 2 ppm). Overall, we demonstrate how small aircraft may provide city level emission measurements that may integrate and validate emission inventories. Optimal atmospheric conditions and measurement strategies for the deployment of aircraft experimental flights are finally discussed.     

Scientific aspects of the framework convention on climate change and national greenhouse gas inventories

Though the principles of the Earth's greenhouse effect have been known for well over a century, it is only recently that advances in climate research have indicated that significant and possibly costly climate change, due to growing emissions of greenhouse gases and their precursors by human activity, is a real possibility. Current estimates of the global human-related emissions of carbon dioxide, methane and nitrous oxide are presented, though many sources remain poorly known or understood. The compilation of national greenhouse inventories as required by the United Nations Framework Convention on Climate Change is likely in the longer term to help improve such global estimates, as long as comparable methodologies are used. The development of the IPCC Guidelines for National Greenhouse Gas Inventories is described, emphasizing the strategies employed to gain wide international participation.     

Carrots and sticks for new technology: Abating greenhouse gas emissions in a heterogeneous and uncertain world

Many governments use technology incentives as an important component of their greenhouse gas abatement strategies. These carrots are intended to encourage the initial diffusion of new, greenhouse-gas-emissions-reducing technologies, in contrast to carbon taxes and emissions trading which provide a stick designed to reduce emissions by increasing the price of high-emitting technologies for all users. Technology incentives appear attractive, but their record in practice is mixed and economic theory suggests that in the absence of market failures, they are inefficient compared to taxes and trading. This study uses an agent-based model of technology diffusion and exploratory modeling, a new technique for decision-making under conditions of extreme uncertainty, to examine the conditions under which technology incentives should be a key building block of robust climate change policies. We find that a combined strategy of carbon taxes and technology incentives, as opposed to carbon taxes alone, is the best approach to greenhouse gas emissions reductions if the social benefits of early adoption sufficiently exceed the private benefits. Such social benefits can occur when economic actors have a wide variety of cost/performance preferences for new technologies and either new technologies have increasing returns to scale or potential adopters can reduce their uncertainty about the performance of new technologies by querying the experience of other adopters. We find that if decision-makers hold even modest expectations that such social benefits are significant or that the impacts of climate change will turn out to be serious then technology incentive programs may be a promising hedge against the threat of climate change.     

Optimal Policy Mechanism Design for Cross-Sector and Multi-Stage Pollution Control with a Bilevel Model: Application to SO<Subscript>2</Subscript> Emission in China

In this paper, we construct a multi-stage coordinated programming model under tax system to control SO₂ emission. The model is based on an explicitly formulated SO₂ abatement cost function created under Chinese condition. Analysis of the effectiveness and impact on the economy of the model is carried out with consideration of game theory. By solving the model, theoretical results show that the volume-based multi-stage SO₂ tax system has two properties: effectiveness and equal-rate. Based on these theoretical results, empirical study is also performed using Chinese historical data. Compared with yearly single-stage programming model, the tax rate generated by the coordinated multi-stage programming model is time-invariant and rather moderate in scale. The total abatement cost among planning years in our model is 21.03 % less than the actual number and 6.68 % less than that in the single-stage situation. The tax payment suggested by our model is 10.62 % less than by the single-stage model. In general, a coordinated multi-stage programming model helps reduce the overall costs of environmental protection while achieving the same emission control target with less burden added to the economy.     

Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

This paper investigates the design and performance of an allowance reserve in the context of a cap-and-trade program for greenhouse gases. We use a Monte Carlo approach in which the parameters of the marginal abatement cost function, and the supply of offsets, are drawn from specified distributions. Our framework focuses on the potential impact of “medium-run shocks” to abatement cost and offset supply, as opposed to either short-run volatility or permanent shifts in the cost curve. Our model suggests that under reasonable (and even fairly conservative) assumptions about abatement cost and offset supply, an allowance reserve broadly similar to recent proposals for US climate legislation can be effective in containing allowance prices. In our core policy scenario, with a trigger price equal to US $32 in 2015, we estimate that the probability of drawing on the allowance reserve is <25% and the probability of requiring more than 7?GT of reserve tons over 20?years is <5%. We also use the model to explore the trade-off among three features of the reserve that are most relevant to policy makers: the total size of the reserve, the trigger price, and the degree of confidence that the reserve will be large enough to limit allowance prices to the target level. Our essential result is that a lower trigger price, or a higher degree of confidence, requires a larger reserve.     

The Impact of Accidental Deviation by Natural Disaster-Prone Countries on Renegotiation-Proof Climate Change Agreements

This study provides a new framework for international environmental agreements (IEAs), which include punishment exceptions for accidental deviation, using repeated games. We consider that deviation from an agreement can occur accidentally because of phenomena such as natural disasters, even if the agreement is sustained as a weakly renegotiation-proof equilibrium. If an IEA signatory deviates accidentally, it fails to achieve its emission abatement target. In the repeated game, a cooperative relationship among signatories is sustained by a strategy that prescribes rules of cooperation and punishment for deviation. We present a new strategy, called Regional Cooperative, which integrates accidental deviations into an IEA. Our model reveals that punishing countries tend to revoke the punishment of deviators and return to cooperation if an accidental deviator increases its abatement volume. That is, the abatement efforts of the accidental deviator can lead to renegotiation. The Regional Cooperative strategy motivates the accidental deviator to try to engage in abatement and the punishing countries to restart cooperation by renegotiation. We conclude that social welfare loss by punishment is prevented through renegotiation in cases of accidental deviation.     

How to effectively guide carbon reduction behavior of building owners under emission trading scheme? An evolutionary game-based study

The building sector accounts for the largest proportion of global carbon emissions. The implementation of a market-based emission trading scheme offers a wider range of strategic choices and greater flexibility for building owners to reduce carbon emissions, but few of them are enthusiastic and actively engaged. To address the problem, this study explores how governments can effectively guide the carbon mitigation actions of building owners under an emission trading scheme (ETS) by continually adjusting and optimizing their regulation strategies. First, an extended evolutionary game model is built, considering the synergistic effect of multiple regulation policies, to theoretically depict the long-term interactive, extensive correlative, and dynamic feedback relationship between the government and building owners. Second, taking advantage of system dynamics as a policy laboratory, a scenario cultivation and simulation analysis is conducted to fully investigate the implementation effects of different regulation strategies based on the behavioral responses of building owners under different scenarios. The city of Shenzhen is a pioneer in covering the building sector in its carbon trading scheme in China, and its hotels above four stars are selected as the realistic setting for the simulation analysis. The results demonstrate that under the emission trading scheme, compared with increasing levels of carbon monitoring and non-financial incentives for building owners, intervention measures, including penalties, subsidies, and public scrutiny, are more efficient and important for the government. These findings provide important theoretical guidance and practical implications for the government to further adjust and optimize its carbon regulation strategies for the building sector.     

The Impact of Unilateral Commitment on Transboundary Pollution

To reach a common target of environmental quality, countries can choose to commit to a stream of pollution abatement right from the beginning of the game or decide upon abatement at each moment of time. Though most of the previous literature studies homogeneous strategies where no country or all countries commit to a (same) predefined policy, reality goes along a different way: some countries make more efforts than others to reduce pollutant emission. The main novelty of this paper resides in the introduction of this kind of heterogeneous strategic behavior currently observed among large pollution nations. We find that the pollution level can be lower under heterogeneous than under homogeneous strategies. A stringent environmental quality target will induce the committed player to produce an abatement effort that more than compensates the free-riding attitude of the non-committed player.     

Disequilibrium and Indivisibility of Pollution Control Equipment Under a Permit-Trading System: A Case Study of Kao-Hsiung and Ping-Tung Counties in Taiwan

A mixed-integer programming model that minimizes the social abatement cost is used to investigate whether a market equilibrium condition could be reached in a newly proposed permit-trading market for nitrogen oxide control in Taiwan. Unlike in previous studies, unit pollution abatement cost is determined endogenously by incorporating technology adoption as a binary decision variable. The results show that when technologies are lumpy and irreversible, disequilibrium might occur due to firms’ inability to manage their emission levels after installing equipment with fixed size and control capacity.

The role of secondary particulates in European emission abatement strategies

Economic assessments have indicated that the greatest benefits of reducing atmospheric emissions of sulphur and nitrogen compounds in Europe come from the resulting reductions in secondary particulate concentrations. For comparison with abatement strategies devised to reduce exceedance of critical loads for acidification, this paper, therefore, considers optimisation of emission abatement strategies to reduce secondary particulate concentrations and minimise human exposure. It is seen that this changes the relative emphasis between some countries in reducing their emissions, and also places less importance on emissions of ammonia from agriculture relative to those of SO₂ and NO_x. The effect of placing emphasis on improvement in the more highly polluted areas of Europe is also examined by imposing a threshold. The benefits of the strategies in terms of ecosystem protection and human exposure to particulates are presented for all scenarios studied. The scenarios are also interpreted in terms of a blame matrix for human exposure to secondary particulates.     

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.