Wuppertal Institut für Klima, Umwelt, Energie GmbH: News

20.12.2004

Within the research project "The Introduction of Emissions Trading Systems as a Socio-Ecological Transformation Process"

Many countries and regions have started to integrate emissions trading into their spectrum of national climate policy instruments. The emergence of numerous national and sub-national emission trading schemes raises the issue of linking them. What economic and environmental effects can be expected? What are crucial institutional and political preconditions for linking? In terms of economic efficiency and global equity, will the effects of connected domestic markets at the entity level be similar to the ones that have been analysed for trading at the government level? What will be the contribution of linking processes to achieving more ambitious targets for reducing greenhouse gas emissions? The project addresses these questions by integratively assessing different alternative policy scenarios of linking domestic emission trading systems (ETS) in four sub-projects.

Policy Scenarios (CSP 1)
The technique chosen for the assessment of the effects of linking national and sub-national emissions trading schemes is the scenario technique. Given the large differences in designing and implementing domestic schemes, a number of alternative policy scenarios of linking processes will be defined and then be assessed in economic, environmental and institutional terms. These policy scenarios are specified by so-called storylines, which define the basic variables of the scenarios. The basic variables here are,

the participating countries,
the institutional status with regard to the climate regime and
the time-horizon by when domestic schemes will be developed and will (probably) be linked to an emerging multi-national emissions trading scheme.

In all scenarios, the CDM countries Brazil, Mexico, India China and South Korea are included.

Impacts of Linking ETS on Equal Distribution of Per Capita Emissions (CSP 2)
To "prevent dangerous anthropogenic interference with the climate system" as required by Article 2 of the Climate Convention, more ambitious emission reduction targets are necessary than those agreed under the Kyoto Protocol. To increase acceptability of those targets, fairness principles such as convergence of per capita emissions entitlements will play an important role. Linking the EU ETS to other national trading systems and to the project-based mechanisms of the Kyoto Protocol, CDM and JI, will affect per capita emissions in the EU. The questions to be investigated in this sub-project are, first, which level of per capita emission entitlements in industrialised and developing countries result from a 550 ppm CO2 equiv. stabilisation scenario, and second, what implications have different linking scenarios and design elements of the ETS on per capita emissions levels in Europe.

Economic and Environmental Effects (CSP 3)
This sub-project quantitatively assesses the economic impacts and reduction efforts of alternative linking scenarios including use of the CDM. Analyses are performed using a numerical multi-country equilibrium model of the world carbon market based on marginal abatement cost functions. For a realistic reproduction of the European ETS, the model explicitly divides the various national economies into energy-intensive (trading) and remaining (non-trading) sectors. As a result, distributional effects between ETS participants, CDM host and donor countries as well as between sectors of the economies are analysed.Impacts of linking ETS on equal distribution of emissions.

Implications of Design Differences (CSP 4)
This sub-project surveys the current status of the currently evolving domestic emission trading systems and analyses their designs. It emerges that the schemes differ significantly in key design aspects, which gives rise to the question in how far linking might impair rather than enhance the ecological integrity and economic efficiency of trading. The project outlines what adjustments might be made to allow for linking and what the cost-benefit ratio would be.

Hypotheses
The anticipated effects of linking domestic ETS are:

In economic terms, generally the linking of domestic schemes should reduce the over-all reduction costs. However, the level of cost reduction crucially depends on the cost structures and technological pre-conditions of participating countries/regions as well as on the specific design of the market (i.e. on the allowance allocation mode).
In institutional terms, differences in ETS design do matter. Key differences in design require adjustments to be made and in some cases the drawbacks may outweigh the benefits. Additionally, from the perspective of the future development of an international climate regime, the bottom-up approach of linking domestic schemes serves to bolster the Kyoto regime, especially with a view to its extension beyond its first commitment period.

In terms of global equity, linking the EU ETS with other ETS and JI/CDM might prevent a fundamental restructuring of the global energy system in industrialised countries as per capita emissions need to decrease only very slowly.

Downloads:
JET-SET Working Paper II/06
N. Anger, B. Brouns, J. Onigkeit: "Linking the EU Emissions Trading Scheme under Alternative Climate Policy Stringencies: An Economic Impact Assessment" ( 1.53 MB )
JET-SET Working Paper III/06
R. Schüle, N. Anger, C. Beuermann, M. Braun, B. Brouns, R. Duckat, J. Onigkeit, W. Sterk: "Linking Emissions Trading Schemes: Institutional, Economic and Environmental Effects of Policy Scenarios" ( 761 KB )
JET-SET Working Paper I/06
W. Sterk, M. Braun, C. Haug, K. Korytarova, A. Scholten: "Ready to Link Up? : Implications of Design Differences for Linking Domestic Emissions Trading Schemes" ( 763 KB )

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