An Analysis with the CERT Model of the FSU Market Power in the Carbon Emissions Trading Market

This paper aims to assess the consequences of the amendments made to the Kyoto Protocol during COP 7 in Marrakech. The major issue of hot air and CDM transaction costs is examined using the CERT model to show that primary supply regions, typically those with hot air availability, might control the emissions reduction permit supply market and maximise net export revenues of permit supply by withholding 40 to 60% of available hot air credits. The assumption that primary permit suppliers control permit price via a restriction of hot air supply to the market will inadvertently leave a portion of the market share open to non-Annex B CDM supply, despite potentially extreme variance in CDM transaction costs. A summary table of policy implications on the emissions reduction permit market is also included.