Uncertainty, Cost-effectiveness and Environmental Safety of Robust Carbon Trading: Integrated Approach

Ermolieva, T., Ermoliev, Y., Jonas, M. ORCID: https://orcid.org/0000-0003-1269-4145, Obersteiner, M. ORCID: https://orcid.org/0000-0001-6981-2769, Wagner, F. ORCID: https://orcid.org/0000-0003-3429-2374, & Winiwarter, W. ORCID: https://orcid.org/0000-0001-7131-1496 (2013). Uncertainty, Cost-effectiveness and Environmental Safety of Robust Carbon Trading: Integrated Approach. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-13-003

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Abstract

The emission trading scheme was devised to lower the cost of achieving greenhouse gas emission reductions: emissions are reduced where it is cheapest and emission certificates are then traded to meet the nominal targets for each participant. However, carbon markets, like other commodity markets, are volatile. They react to stochastic "disequilibrium" spot prices, which may be affected by inadequate policies, speculations and bubbles. The market-based emission trading, therefore, does not necessarily minimize abatement costs and achieve emission reduction goals. We introduce a basic stochastic trading model allowing to analyze the robustness of emission reduction policies under asymmetric information and other multiple anthropogenic and natural uncertainties. We illustrate functioning of the robust market with numerical results involving such countries as US, Australia, Canada, Japan, EU27, Russia, Ukraine. In particular, we analyze if the knowledge about uncertainties may affect portfolios of technological and trade policies or structure of the market and how uncertainty characteristics may affect market prices and change the market structure.

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