Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy

Zhang, Fan

World Bank, Washington, DC

关键词: ABATEMENT COSTS;    ACID RAIN;    AFFORDABLE ENERGY;    AGGREGATE EMISSION;    ALLOWANCE TRADING;   

DOI  :  10.1596/1813-9450-4215
RP-ID  :  WPS4215

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

Emission permit trading is a centerpieceof the Kyoto Protocol which allows participating nations totrade and bank greenhouse gas permits under the FrameworkConvention on Climate Change. When market conditions evolvestochastically, emission trading produces a dynamic problem,in which anticipation about the future economic environmentaffects current banking decisions. In this paper, the authorexplores the effect of increased uncertainty over futureoutput prices and input costs on the temporal distributionof emissions. In a dynamic programming setting, a permitprice is a convex function of stochastic prices ofelectricity and fuel. Increased uncertainty about futuremarket conditions increases the expected permit price andcauses a risk-neutral firm to reduce ex ante emissions so asto smooth out marginal abatement costs over time. Theconvexity results from the asymmetric impact of changes incounterfactual emissions on the change of marginal abatementcosts. Empirical analysis corroborates the theoreticalprediction. The author finds that a 1 percent increase inelectricity price volatility measured by the annualizedstandard deviation of percentage price change is associatedwith an average decrease in the annual emission rate by 0.88percent. Numerical simulation suggests that high uncertaintycould induce substantially early abatements, as well aslarge compliance costs, therefore imposing a tradeoffbetween environmental benefits and economic efficiency. Theauthor discusses policy implications for designing aneffective and efficient global carbon market.