Dynamic Carbon Emission Permit Prices and Emission Trade

The evaluation of the cost of reduction for the different region and the resulting emission permit prices is a typical model application. The usual approach to analyze emission trading is to obtain marginal emission reduction cost curves from the models and subsequently carry out a static, expost analysis of emission trading based on these cost curves. The drawback of this approach is that effects resulting from the introduction of different carbon constraints (change in prices, demands, etc) are not taken into account and ambiguity remains surrounding the timing of emission reductions and the introduction of shadow carbon values or permit prices. These drawbacks can be overcome by endogenizing the permit prices. The equilibrium emission permit price is being calculated within the model for each point in time (ie each year) for the given constraints. The results are time profiles for permit prices which in themselves are analytically significant. This ‘dynamic’ permit prices approach opens the way for analysis involving permit banking and enables discounting in the calculation of both emission reduction costs and the value of permit sales/purchases. Introduction Discussions on the future energy systems today mainly a centered around the climate change issue. The threat of climate change was big enough to bring about the Kyoto protocol. A major issue within the negotiations after Kyoto is emission trading. Trading emissions is offering attractive advantages, however, for the realization of the concept quantitative analysis is necessary to supply policy makers with the cost, advantages and drawbacks of different schemes. The evaluation of the cost of reduction for the different region and the resulting emission permit prices is a typical model application. POLES (Prospective Outlook for Long-term Energy Systems) of the European Commission is a simulation model for the development of long-term (2030) energy supply and demand scenarios for the different regions of the world (currently 38 regions) [1,2]. The POLES model recently has been extensively used to carry out analyses of CO2 reduction strategies and emission trading [3]. The usual approach to analyze emission trading is to obtain marginal emission reduction cost curves from the models and subsequently carry out a static, ex-post analysis of emission trading based on these cost curves. The drawback of this approach is that effects resulting from the introduction of different carbon constraints (change in prices, demands, etc) are not taken into account and ambiguity remains surrounding the timing of emission reductions and the introduction of shadow carbon values or permit prices. Also for the analyses carried out using the POLES model [3], the issues of the Marginal Abatement Costs and of the International Carbon Value derived from international flexibility