8.3.1.2 Impacts of Caps on the Use of Trading
From the above results, it is seen that all OECD countries have an interest
in making the market as large as possible. Some Parties to the UNFCCC, however,
have suggested that the supplementarity conditions of Articles 6.1.d, 12 and
17 of the Kyoto Protocol be translated into quantitative limits placed on the
extent that Annex I countries can satisfy their obligations through the purchase
of emission quotas. The rationale for the supplementarity condition is that,
if the price of permits were too low, this would discourage domestic action
on structural variables (infrastructure, transportation) or on innovation apt
to modify the emissions trends over the long run. These measures are very often
liable to high transaction costs and governments may prefer to import additional
emissions permits instead of adopting such measures. In other words, minimization
of the costs of achieving Kyoto targets may not guarantee minimization of the
costs of climate policies over the long run; this is the case when the inertia
of technical systems is considered (Ha-Duong et al., 1999) and when one
accounts for the long term benefits of inducing technical change through abatements
in the first period (Glueck and Schleicher, 1995).
Some works have studied the consequences of enforcing the supplementarity condition
through quantitative limits: one of the EMF scenarios imposed a constraint on
the extent to which a region could satisfy its obligations through the purchase
of emission quota (the limit was one-third).
However, the models cannot deliver any response without
an assumption about ex ante limits on carbon trading, resulting into
a stable duopoly between Russia and Ukraine or into a monopsony (Ellerman and
Sue Wing, 2000). In the first case, the price of carbon will be higher than
in a non-restricted market, and most of the additional burden will fall on countries
in which the marginal cost curve is high because they have a lesser potential
for cheap abatement. This is typically the case for Japan and most of the European
countries (Hourcade et al., 2000b). The other possibility is for the
market power to be controlled by the carbon-importing countries; in this case,
the risk is that all or most of the trading will be of “hot air” at
a very low price. Which of these alternatives will be realized cannot be predicted
but, in both cases, quantitative limits to trade lead to outcomes that contradict
the very objective of the supplementarity condition. Criqui et al. (1999)
assessed the order of magnitude at stake with the POLES model, and examined
a scenario in which the carbon tax is US$60/tC with unrestricted trade. They
found that the carbon prices under the concrete ceiling conditions proposed
by the EU fall to zero (with no market left for the developing countries) if
the market power is held by the buyers. Alternatively, the carbon prices increase
up to US$150/tC if the market power is held by the sellers, this risk being
increased in the case of caps on hot air trading which increases the monopolistic
power of Russia and Ukraine. Böhringer (2000) assesses the economic implications
of the EU cap proposal within competitive permit markets. He concludes that
part of the efficiency gains from unrestricted permit trade could be used to
pay for higher abatement targets of Annex-B countries which assure the same
environmental effectiveness as compared to restricted permit trade but still
leaves countries better off in welfare terms.
8.3.1.3 The Double Bubble
Here the case of the “double bubble” is examined, in which countries
belonging to the EU have a collective target, making use of the flexibilty to
shift emission quota within the group and the remaining Annex I countries trade
among themselves to reach their individual targets.
Figure 8.11 shows the incremental value of carbon emission
for the two groups and compares them with that of full Annex I trading. Notice
that for the USA, the tax is lower in the case of the “double bubble”
than with Annex I trading. The reason is that without the EU bidding for the
Russian “hot air”, the demand for emission quotas falls as does its
price. The EU on the other hand is disadvantaged under such a scenario. With
their access to low cost emission quotas limited, the incremental value rises.
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