Kyoto permits’ price will not be low: Exploring future commitments and the role of banking Vincent van Steenberghe UcL-IRES et CORE

Kyoto permits’ price will not be low:

Exploring future commitments and the role of banking

Vincent van SteenbergheUcL-IRES et CORE

Purpose (1)

• Main results of MacGEM (2008 – 2012) :

-2,2

-2

-1,8

-1,6

-1,4

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

EU15 OEU AUZ JAP CAN An.-B* CEU USA

To

tal c

os

ts /

GD

P 2

010

Kyoto Protocol (price: 21.93 $1995/tCO2)

Without USA (price: 10.03 $1995/tCO2)

Without USA with sinks (price: 5.38 $1995/tCO2)

Without USA with sinks with Commitment Period Reserve (price:9.30 $1995/tCO2)

Without USA with sinks with Commitment Period Reserve withimperfect domestic policies in Annex-B (price: 12.05 $1995/tCO2)

Purpose (2)

• Extend MacGEM model to future commitment periods in order to analyse– Future participation and commitments of Annex B and non-

Annex B countries– Future burden sharing arrangements – The role of banking– The impact of these elements on Kyoto permits price

• MacGEM(+) is an ‘easy to use’ model based on Marginal Abatement Cost curves for CO2 emissions

• MacGEM+ offers large possibilities of sensitivity analyses and focuses on key parameters (technological progress, discount rate, baseline emissions, efficiency of domestic policies, …)

Content of the presentation

• Model of banking with MACs• Set-up of MacGEM+• Possible scenarios• Simulations

– Reference scenarios– Participation structure– Allocation rules– Hot air issue

• Sensitivity analysis

Model of banking with MACs (1)

• Illustration of trading between countries without inter-temporal trades

E i

price2 price2

Permits i Permits j

TRADES 2

MAC i

MAC j

E j

Total permits 2

price1 price1

Permits i Permits j

TRADES 1

MAC i

MAC j

E iE j

Total permits 1

Period 1 Period 2


Price(1,2) price2

Permits i Permits j

MAC i

MAC j

E j

Total permits 2

price1

Permits i Permits j

BANK 1

MAC i

MAC j

E iE j

Total permits 1

BANK 2

Period 1 Period 2

• Illustration of trading between countries with inter-temporal trades


Period1 2 3

Price

Period1 2 3

Price

Price (1-3)

Period1 2 3

Price

Price (1-2)

Period1 2 3

Price

Price (1-3)

Price (1-2)

No banking Banking 1-3

Banking 1-3Banking 1-2


• Why ‘two consecutive periods’ ? Because, if profitable, banking– Decreases price of last period (which does not impede on banking

opportunities with ‘future’ periods –and even fosters it)– Increases price of first period (which does not impede on banking

opportunities with ‘previous’ periods –and even fosters it)

Period1 2 3

Price

Price (1-4)

Price (1-2)

Price (3-4)

4

• Model solved by loops until only ‘decreasing steps’

• Each loop: compute banking between two consecutive periods iff banking is profitable (and if so, consider then these two periods as a single one)


• Remarks on the use of MACs:– Advantage of MACs: ‘easy to use’ model allowing much

flexibility in, for instance, participation structure– Drawback of MACs: dynamics only via inter-temporal trades

of permits (exogenous technological change)





Set-up (1)

• 5 commitment periods of 5 years (2008 – 2032)• 15 regions:

label name CompositionEU15 European UnionOEU other Europe Iceland, Norway, SwitzerlandCEU Eastern Europe and former

Soviet UnionBulgaria, Czech-Rep, Hungary, Poland, Romania, Slovak-Rep, Slovenia, formerSoviet Union

AUZ Australazia Australia, New ZealandJAP JapanCAN CanadaUSA USAMED Mediterranian Turkey, Morocco, Algeria, Egypt, Libya, TunisiaMEA Middle East Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia,

Syria, United Arab Emirates, YemenAFR Africa Angola, Benin, Botswana, Burkina-Fasso, Burundi, Cameroon, Cape Verde, Central

African Republic, Chad, Comoros, Congo, Republic of Congo, Djibouti, Ethiopia,Gabon, Gambia, Ghana, Guinea, Guinea Bissau, Ivory Coast, Kenya, Leshoto,Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia,Niger, Nigeria, Reunion, Rwanda, Senegal, Seychelles, Sierra-Leone, Somalia, SouthAfrica, Sudan, Swaziland, Tanzania, Togo, Uganda, Zambia, Zimbabwe

CHI China China, Hong KongIND IndiaASIA Asia South Korea, Indonesia, Malaysia, Philippine, Singapore, Thailand, Vietnam, Taiwan,

Sri-Lanka, Bangladesh, Nepal, PakistanSAM South America Costa-Rica, Cuba, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras,

Jamaica, Antilles, Nicaragua, Panama, Trinidad-Tobago, Venezuela, Colombia,Bolivia, Ecuador, Peru, Argentina, Brazil, Chile, Uruguay, Paraguay

ROW rest of world

Set-up (2a)

• Baseline emissions, GDP and population: IPCC SRES scenarios (IMAGE2)

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 21000

5

10

15

20

25

30

35IPCC SRES Scenarios: world CO2 emissions (GtC)

A1BA1TA1FA2B1B2Mean

Set-up (2b)

• Population from SRES

2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 21006

8

10

12

14

16IPCC SRES Scenarios: world population

A1 B1A2B2Mean

Setup (3a)

• Marginal abatement cost curves in 2010 from GEM-E3-World (Annex B)

0

20

40

60

80

100

120

140

160

180

200

-0.3

0

-0.2

7

-0.2

4

-0.2

1

-0.1

8

-0.1

5

-0.1

2

-0.0

9

-0.0

6

-0.0

3

0.0

0

0.0

3

0.0

6

0.0

9

0.1

2

0.1

5

0.1

8

0.2

1

0.2

4

0.2

7

0.3

0

0.3

3

percentage emission abatement w.r.t. 1990

US

$1

99

5 p

er

ton

of C

O2

EU15: 8%

USA: 7%

JAP: 6%

OEU: 3.8%

CEU: 1.4%

CAN: 6%

AUZ: 2.7%

p=21.9$

5%

Set-up (3b)

• MACs in 2010 extended to subsequent commitment periods with– Increasing efficiency of domestic abatement policies:

• A set of MACs has been computed assuming some inefficiency in domestic abatement policies (same percentage of emission reductions in every economic sector rather than efficient abatement policy)

• Parameter of domestic efficiency which generates new MACs

– Parameter of technological progress:• Affects marginal absolute abatement costs in a multiplicative

way • Value differs across regions: from x% (min) to y% (max)

according to rate of bau emissions increase between 2010 and 2030

• Needs to be further analysed …!

Set-up (4)

• Discount rate: see US Acid Rain program (Ellerman, 2002)

• CDM: increasing accessibility and decreasing trans. costs

• Sinks in 2008-2012: free and up to limits negotiated in Bonn and Marrakesh

Reference parameter values

1 technological progress From 5% to 25% (same each period)

2 Efficiency of domestic policies From 75% (2010) to 95% (2030)

3 Discount rate 5% per year

4 Baselines SRES Mean

5 CDM access 30% (2010), 40% (2015), 50% (2020-2030)CDM transaction costs 20% (2010), 15% (2015), 10% (2020-2030)

6 Sinks No sinks after 2012





Scenarios (1)

• In each period, set participation of– Annex B countries (+domestic policy when no participation) – non-Annex B countries

• Emission (reduction) objectives …– Set world emissions objective in periods 4 (2025) and 5 (2030)– Then world objectives in periods 2 (2015) and 3 (2020) are on

linear trajectory between period 1 (Kyoto – 2010) and period 4 objectives

– Possibility to set objectives for each (group of) region(s)

• … and their allocation– Several allocation rules are analysed: ‘Kyoto’, egalitarian,

grandfathering, ability to pay, energy intensity, … and the ‘Jacoby et al.’ allocation-participation rule. Convergence towards egalitarian rule also possible.

Scenarios (2)

Reference scenarios

Participation 1 non-Annex B commitment All non-Annex B countries in period 3 (2020)

2 Annex B participation USA in period 2 (2015)

2 bis (domestic policy) USA: -5% in period 1 (2010)

Objectives 3 World emissions: WEAK 34,0 GtCO2 in 2025 - 35,0 GtCO2 in 2030

World emissions: STRONG 25,5 GtCO2 in 2025 - 24,5 GtCO2 in 2030

4 Allocation rule Kyoto with convergence in 2080

Scenarios (2 bis)

• Quotas in each region and world bau emissions

Quotas (GtCO2); SRES=Mean; Scenario WEAK

2010 2015 2020 2025 20300

5

10

15

20

25

30

35

40

45

USACANE15OEUCEUAUZJAPMEDMEAAFRCHIINDASISAMROW

Quotas (GtCO2); SRES=Mean; Scenario STRONG

2010 2015 2020 2025 20300

5

10

15

20

25

30

35

40

45

USACANE15OEUCEUAUZJAPMEDMEAAFRCHIINDASISAMROW


• Model of banking with MACs• Set up of MacGEM+• Possible scenarios• Simulations



SimulationsReference scenario WEAK (1)

• Allocation:– Far from egalitarian in 2030

– Hot air for IND (0.292 GtCO2 in 2020 to 0.554 GtCO2 in 2030) and for AFR (0.021 GtCO2 in 2020)

• Permits price and amount of banking:

Price : no banking - banking ($95/tCO2)

2010 2015 2020 2025 20300

5

10

15

20

25

30

35Amount of banking (GtCO2)

2010 2015 2020 2025 2030-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6


• TradesTrades of quotas (net sales in GtCO2)

Each country :2010,2015,2020,2025,2030USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM ROW

-1

-0.5

0

0.5

1

1.5


• Discounted costs periods 1 - 3

Discounted total cost per period (%of GDP):

Each country :2010,2015,2020USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM nAB

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6


• Impact of banking on costs over the five commitment periods

Disc. total cost all periods (%of GDP):No Banking - Banking

USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM nAB-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Disc. total cost all periods (billion $95):No Banking - Banking

USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM nAB-20

-10

0

10

20

30

40

SimulationsReference scenario STRONG (1)

• Allocation:– Hot air only for AFR in 2020 (0.045 GtCO2)

• Permits price and amount of banking:

Price : no banking - banking ($95/tCO2)

2010 2015 2020 2025 20300

20

40

60

80

100Amount of banking (GtCO2)

2010 2015 2020 2025 2030-1.5

-1

-0.5

0

0.5

1

1.5

2

SimulationsReference scenario STRONG (2)

• Impact of banking on costs over the five commitment periodsDisc. total cost all periods (%of GDP):No Banking - Banking

USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM nAB-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Disc. total cost all periods (billion $95):No Banking - Banking

USA CAN E15 OEU CEU AUZ JAP MED MEA AFR CHI IND ASI SAM nAB-50

0

50

100

150

200

250

300

Assumption: participating countries receive amount of permits

independent of participation structure

SimulationsParticipation structure (1)

Participation structure USA: 2015 USA: 2015 USA: 2020

nAB: 2015 nAB: 2020 nAB: 2020

Weak Price bank, (disc) ($95/tCO2) 9,9 10,5 10,1

World emissions (GtCO2) 161,021 161,129 162,182

Banking in 2010 (GtCO2) 0,457 0,503 0,472

in 2015 (GtCO2) 0,653 -0,203 0,373

in 2020 (GtCO2) 0,062 0,256 0,125

Total costs EU15 (% GDP) 0,079 0,082 0,08

Total costs non-Annex B (% GDP) 0,019 0,021 0,023

Strong Price bank, (disc) ($95/tCO2) 31,2 31,8 31,6

World emissions (GtCO2) 133,521 135,132 136,641

Banking in 2010 (GtCO2) 1,731 1,762 1,751

in 2015 (GtCO2) 1,793 1,216 1,413

in 2020 (GtCO2) -0,273 -0,143 -0,187

Total costs EU15 (% GDP) 0,338 0,342 0,34

Total costs non-Annex B (% GDP) 0,501 0,457 0,458

• Significant change in world emissions (period 2)• Limited effect on prices• Banking

– Stable in period 1– Increase in period 2 and decrease in period 3

SimulationsParticipation structure (2)

• Only on ‘strong’ scenario• Changes in allocation rules:

– ‘Soft entry’ for non-Annex B countries– Change in year of convergence– Grandfathering (1990) towards egalitarianism– Jacoby, Schmalensee and Wing allocation-participation rule

SimulationsOther allocation rules (0)

• ‘Soft entry’ for non-Annex B countries: distribution of permits according their bau emissions for their first commitment period (2020)– World emissions over five periods increase: from 135.1 to

139.5 GtCO2 (x5)– Discounted permits’ price decreases: from 31.8$ to 27.7$– Banking in period 3 increases considerably: from –0.143 to

+3.352 GtCO2, but decreases in periods 1 and 2– Total discounted costs for Annex B regions: -5 to -10 %– Total discounted costs for non-Annex B regions: -50 %, with

large gains in period 3

SimulationsOther allocation rules (strong) (1)

• Change in year of convergence


Period of convergence 2030 2050 2080 2100

Quotas per head in 2030 % var <--- % var <--- % var --->

(tCO2) USA 2,9 -68 9,0 -22 11,6 7 12,4

EU15 2,9 -46 5,4 -16 6,4 5 6,7

CEU 2,9 -52 6,1 -18 7,5 5 7,9

IND 2,9 59 1,8 34 1,4 -10 1,2

Sales (net) in 2020 % var <--- % var <--- % var --->

(% of quotas) USA -50,8 198 -17,0 146 -6,9 -38 -4,3

EU15 -54,1 72 -31,5 33 -23,7 -9 -21,6

OEU -57,6 43 -40,2 19 -33,9 -5 -32,2

CEU -19,5 -1088 2,0 -78 8,9 21 10,8

nAB 22,1 104 10,8 115 5,0 -37 3,2

Costs TOT(bank) % var <--- % var <--- % var --->

(% of current GDP) USA 0,833 76 0,475 45 0,328 -13 0,286

EU15 0,577 41 0,410 20 0,342 -6 0,322

CEU 2,482 186 0,868 293 0,221 -85 0,034

nAB -0,406 -298 0,205 -55 0,457 16 0,531

• Grandfathering (1990) towards egalitarianism (in 2080)– Total disc. Costs for Annex B regions: -50%– Total disc. Costs for non-Annex B regions: +200%

• Jacoby, Schmalensee and Wing rule (calibration such that same total world emissions):– Participation structure very different from REF scenarios: MEA

and SAM in period 2 ; ASI in period 3; ROW in period 4 and MED in period 5 (AFR, CHI and IND join later)

– Permits’ price increases from 32.2$ to 39.6$– Annex B total costs: decrease for USA and CEU; increase for

the others (+50%)– Non-Annex B total costs: larger disparity with large gains for

AFR, CHI and IND (all together: -45%)


Not an ‘issue’ anymore since no monopoly effect over all periods

SimulationsMarket power from hot air (CEU in 2010)

% hot air restriction 2010 2015 2020 Total (5 periods) No Banking Tot

Weak 0% (REF) Costs CEU -0,740 -0,215 0,025 -0,065 0,035Price 10,5

25% Costs CEU -0,643 -0,218 0,023 -0,044 0,022Price 10,6

50% Costs CEU -0,543 -0,222 0,021 -0,022 0,014Price 10,7

75% Costs CEU -0,458 -0,237 0,020 -0,006 0,010Price 11,1 11,1 10,8

100% Costs CEU -0,375 -0,263 0,020 0,007 0,013Price 11,8 11,8 10,8

Strong 0% (REF) Costs CEU -2,772 -0,578 0,766 0,221 0,877Price 31,8

25% Costs CEU -2,483 -0,585 0,763 0,288 0,864Price 31,9

50% Costs CEU -2,190 -0,592 0,759 0,355 0,856Price 32,0

75% Costs CEU -1,892 -0,600 0,756 0,423 0,852Price 32,2

100% Costs CEU -1,590 -0,607 0,752 0,492 0,855Price 32,3


• Model of banking with MACs• Set up of MacGEM+• Possible scenarios• Simulations



Sensitivity analysis (1)

• Discount rate: 2% ; 8% (REF: 5%)– Strong effects on amount of banking and therefore on

prices, but weak impacts on total discounted costs

• Baselines: SRES= A1F ; B1 (REF: Mean)– Important effect on emission reductions, on world total

emissions and on prices– Sharp increase in total costs for non-Annex B countries and

for CEU under the A1F (high) baseline

• Technological progress: from 7.5% to 30% ; from 2.5% to 20% (REF: from 5% to 25%)– No spectacular effect on prices– Decrease in tech. Progress Increase in Banking– Similar variations of total costs in all regions


• Efficiency of domestic policies: less efficient (50% in 2010 to 75% in 2030) ; full efficiency (100%) (REF: 75% in 2010 to 95% in 2030)– Limited impacts ; more on Annex B than on nAB total costs

• CDM efficiency: less efficient ; more efficient– Limited impacts ; very small impacts on Annex B total costs


Discount rate a 2%

b 5%

c 8%

a b c a b c

World objectives Weak Strong

Price Banking (disc) 2010 15,7 10,5 8,4 47,2 31,8 22,0

2015 15,7 10,5 8,4 47,2 31,8 22,0

2020 15,7 10,5 7,3 47,2 31,8 22,0

Banking 2010 0,849 0,503 0,343 2,513 1,762 1,229

2015 0,252 -0,203 -0,343 2,202 1,216 0,461

2020 0,610 0,256 0,000 0,615 -0,143 -0,723

Total world emissions (/5) 161,129 161,129 161,129 135,132 135,132 135,132

Total disc, costs USA 0,102 0,090 0,078 0,377 0,328 0,276

(%GDP) EU15 0,094 0,082 0,074 0,386 0,342 0,290

CEU -0,085 -0,065 -0,091 0,166 0,221 0,209

IND -0,300 -0,280 -0,250 -0,073 -0,078 -0,088

nAB 0,023 0,021 0,012 0,509 0,457 0,383


Baselines SRES a A1F (high)

b Mean

c B1 (low)

a b c a b c



2015 21,0 10,5 6,7 45,4 31,8 22,5

2020 21,0 10,5 4,5 45,4 31,8 22,5

Banking 2010 1,077 0,503 0,318 2,355 1,762 1,342

2015 0,897 -0,203 -0,318 2,317 1,216 0,602

2020 0,947 0,256 0,000 0,542 -0,143 -0,526



(%GDP) EU15 0,199 0,082 0,034 0,566 0,342 0,211

CEU 0,250 -0,065 -0,159 1,306 0,221 -0,282

IND -0,229 -0,280 -0,155 1,388 -0,078 -0,420

nAB 0,300 0,021 -0,009 1,450 0,457 0,206


Techn, progress a 7,5% to 30%

b 5% to 25%

c 2,5% to 20%

a b c a b c



2015 9,3 10,5 11,8 28,1 31,8 35,7

2020 9,3 10,5 11,8 28,1 31,8 35,7

Banking 2010 0,413 0,503 0,595 1,568 1,762 1,959

2015 -0,341 -0,203 -0,069 0,920 1,216 1,505

2020 0,139 0,256 0,364 -0,395 -0,143 0,088



(%GDP) EU15 0,073 0,082 0,092 0,307 0,342 0,378

CEU -0,053 -0,065 -0,078 0,222 0,221 0,217

IND -0,261 -0,280 -0,300 -0,143 -0,078 -0,006

nAB 0,016 0,021 0,026 0,387 0,457 0,532


Efficiency dom, pol, 2010 2015 2020 2025 2030

a 50% 55% 60% 65% 70%

b 75% 80% 85% 90% 95%

c 100% 100% 100% 100% 100%

a b c a b c



2015 12,5 10,5 9,7 37,7 31,8 29,2

2020 12,5 10,5 9,7 37,7 31,8 29,2

Banking 2010 0,547 0,503 0,548 1,853 1,762 1,868

2015 -0,149 -0,203 -0,112 1,329 1,216 1,424

2020 0,253 0,256 0,374 -0,135 -0,143 0,103



(%GDP) EU15 0,098 0,082 0,075 0,414 0,342 0,309

CEU -0,070 -0,065 -0,067 0,276 0,221 0,176

IND -0,339 -0,280 -0,253 -0,165 -0,078 -0,035

nAB 0,020 0,021 0,022 0,509 0,457 0,439


CDM efficiency 2010 2015 2020 2025 2030

a Access, 15% 20% 25% 25% 25%

Trans, costs 40% 30% 20% 20% 20%

b Access, 30% 40% 50% 50% 50%

Trans, costs 20% 15% 10% 10% 10%

c Access, 50% 60% 70% 70% 70%

Trans, costs 10% 7,50% 5% 5% 5%

a b c a b c



2015 12,3 10,5 10,1 33,0 31,8 30,4

2020 10,8 10,5 10,1 33,0 31,8 30,4

Banking 2010 0,376 0,503 0,769 1,353 1,762 2,304

2015 -0,376 -0,203 0,127 0,517 1,216 1,894

2020 0,328 0,256 0,113 0,122 -0,143 -0,434



(%GDP) EU15 0,088 0,082 0,080 0,350 0,342 0,333

CEU -0,114 -0,065 -0,051 0,164 0,221 0,278

IND -0,268 -0,280 -0,283 0,031 -0,078 -0,164

nAB 0,028 0,021 0,014 0,524 0,457 0,402

Conclusions

• Banking may have very important impacts on prices (especially in the Kyoto period)

• Level of banking in the Kyoto period may be well above CEU’s hot air

• Banking favours non-Annex B regions and CEU while it increases total costs for the other Annex B regions

• No monopoly effect of CEU due to hot air in the Kyoto period

• High sensitivity to discount rate and baseline emissions

• Need to calibrate technological progress…! (? function of actual previous reductions + baseline ?)

Documents

Kyoto permits’ price will not be low: Exploring future commitments and the role of banking Vincent van Steenberghe UcL-IRES et CORE