Tradable Permit Systems: Considering Uncertainty in Emission Estimates

We simulate the market for emission permits by considering uncertainty in emission inventory reports. The approach taken in this analysis is to enhance the emissions reported in each region by a certain part of their uncertainty when compliance with the Kyoto targets is being proved. While this formulation is not new in the literature, we define the uncertainty component in a way that enables comparison with the approach of effective permits presented in Nahorski, Horabik, and Jonas (2007) Compliance and emissions trading under the Kyoto protocol: Rules for uncertain inventories, (this issue). We show and explain that the transformation to effective permits bears additional costs apart from those resulting from shifting the Kyoto targets.