Instruments for Climate Policy

Instruments for Climate Policy

Limited versus Unlimited Flexibility

New Horizons in Environmental Economics series

Edited by Johan Albrecht

Instruments for Climate Policy focuses on economic and political aspects related to the recent proposals and the debate on limits in flexibility, and discusses EU and US perspectives on climate policy instruments and strategies. This is followed by chapters on economic efficiency and the use of flexible instruments as well as contributions to the debate on ‘when flexibility’, on the arguments behind the EU ceilings proposal and on voluntary approaches to climate policy. One of the main conclusions reached with respect to proposals for limiting flexibility is the need to evaluate simultaneously their economic, ecological and international political consequences. The authors include both important policymakers and leading academics in the area.

Chapter 3: Economic efficiency of cross-sectoral emissions trading in CO2 in the European Union

Pantelis Capros, Leonidas Mantzos and Matti Vainio

Subjects: economics and finance, environmental economics, environment, climate change, environmental economics


3. Economic efficiency of cross-sectoral emissions trading in CO2 in the European Union1 Pantelis Capros, Leonidas Mantzos, Matti Vainio and Peter Zapfel 1. INTRODUCTION Most economic analysis and models of emissions trading in greenhouse gases have been on a fairly aggregate international level and implicitly assumed governments to be the main actors. The models have mainly varied in terms of country coverage (for example Annex B, non-Annex B, OECD countries only and so on) in the trading regime. Several studies concluded that if all Annex B countries traded amongst themselves, the cost of complying with the Kyoto (or other climate) target would be reduced significantly. For instance, in a recent study by Coherence (1999) it was estimated that the compliance cost for all Annex B countries would be reduced by 58 per cent if trading were allowed among all of them. The compliance cost for the EU would be reduced by 15 per cent. Other studies give similar orders of magnitude and show that the costs of complying with the Kyoto Protocol are significantly lower under international emissions trading than if any of the major industrial countries implemented the Protocol target individually. This is confirmed by all general equilibrium model results shown in Table 3.1 and also by the world energy model POLES, which demonstrates that, without trading, the EU countries would need to raise the price of CO2 by €38 per ton in 2010. It would rise only by €20 with international emissions trading. The...

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