11.4.3.3 Policy studies for Europe

Since the TAR, many studies have analysed the macro-economic costs in Europe of committing to Kyoto or other targets, different trade regimes, and multiple greenhouse gases. We report results from some of the key studies below.

An important development within the European Union has been the production of additional detailed results from individual member states. Viguier et al. (2003) provide a comparison of four model estimates of the costs of meeting Kyoto targets without trading (except for the EU estimate) based on the 1998 burden sharing agreement replicated in Table 11.11. EPPA and GTEM are both CGE models, while POLES and PRIMES are partial-equilibrium models with considerable energy sector detail. Viguier et al. (2003) explain differences between model results in terms of baseline forecasts and estimates of abatement costs. Germany, for example, has lower baseline emission forecasts in both POLES and PRIMES, but at the same time higher abatement costs. The net effect is that national carbon prices are estimated to be lowest in Germany in POLES and PRIMES while EPPA and GTEM find lower costs in the United Kingdom. Overall, the two general-equilibrium models find similar EU-wide costs located between the POLES and PRIMES estimates.

Viguier et al. (2003) go on to discuss the differential consequences across European countries. They find that other measures of cost – welfare and GDP losses – generally follow the pattern of estimated allowances prices, as allowance prices reflect the marginal abatement costs. France, the United Kingdom, and Germany face lower costs and Scandinavian countries generally face higher costs. Terms of trade generally improve for European countries, except for the United Kingdom and Denmark, the former owing to its position as a net exporter of oil and the latter owing to its very low share of fuels and energy-intensive goods in its basket of imports.

There are other studies estimating the equilibrium price in the European market with emissions trading and savings, as compared to a no-trade case (see also 13.2.1.3). An early study by IPTS (2000) calculates the clearing price in the EU market in 2010 at about 50 US$(2000)/tCO₂ using the POLES model, with a 25% cost reduction arising from emissions trading among countries, and Germany and the UK emerging as net sellers. A more recent study by Criqui and Kitous (2003), which also uses the POLES model, finds even larger gains and lower prices: the equilibrium allowance price is 26 US$(2000)/tCO₂^[10], and trading among countries reduces total compliance costs by almost 60%. Without any competition from non-trading European countries and the other Annex B countries on the JI and CDM credits market, they further estimate that the allowance price collapses from 26 US$/tCO₂ to less than 5 US$/tCO₂, and the annual compliance costs are reduced by another 60%. Using the PRIMES model, Svendsen and Vesterdal (2003) find reductions in costs of 13% from trading within the electricity sector in the EU, 32% EU economy-wide trading, and 40% from Annex B trading. Klepper and Peterson (2004; 2006) consider the division between trading and non-trading sectors in the EU, and emphasize the potential inefficiency of generous allocation plans if the non-trading sectors are forced to make up the difference without significant use of the Kyoto mechanisms.

Eyckmans et al. (2000) investigate the EU Burden Sharing Agreement on the distribution of the Kyoto emissions reduction target over the EU member states, without the EUETS. Even if only cost efficiency is taken into account, they argue that the burden sharing agreement does not go far enough towards equalizing marginal abatement costs among the member states. For instance, some poorer EU member states have been allowed to increase their emissions considerably, but still their allowances are too low. Introducing a measure of inequality aversion reinforces most of the conclusions.

Other studies have looked at the savings from a multigas approach in Europe. The European Commission (1999) finds that, at a cost below about 50 US$/CO₂-eq, 42% of total reduction needed may come from non-CO₂ emissions. Burniaux (2000) finds that a multigas approach reduces the costs of implementing the Kyoto Protocol in the European Union by about one third. For Eastern European countries, the reduction in costs will be even higher when they use a multigas approach. Jensen and Thelle (2001) find similar results using the EDGE model to include non-CO₂ gases, with EU welfare costs falling from about 0.09% to 0.06% in 2010 compared to the baseline.

Babiker et al. (2003) use the EPPA-EU model to study the idea that emission permits trade may negatively impact welfare in some cases because of the presence of non-optimal taxation in the pre-trade situation. The selling of permits pushes up a country’s carbon price. When a rise in price comes on top of an already distorted fuel price, this results in an additional negative effect on welfare, which might outweigh the gains from sales of permits. It is a negative price effect and a positive income effect. This study finds that some countries, like Scandinavian countries or Spain (mainly importers of carbon permits), would be better off with international trading. Others, like the United Kingdom, Germany or France (mainly exporters of permits) are worse off with trading than without.

In summary, the costs of committing to the Kyoto Protocol may be less than 0.1% of GDP in Europe with flexible trading. U.S. rejection of the Kyoto Protocol reduces the costs of Kyoto in Europe if there are flexible mechanisms in place but, because of the effects of trading terms, pushes costs upwards in the absence of emissions trading or other flexible mechanisms. The permit prices and costs depend on restrictions on trade and the possible exercise of market power in the emission permit market. Multiple greenhouse gas abatement will reduce costs compared to a situation with only CO₂ abatement, a point also emphasized in Section 3.3.5.4.