Limited Sectoral Trading between the EU ETS and China
In the negotiations of the United Nations Framework Convention on Climate Change (UNFCCC), new market mechanisms are proposed to involve Non-Annex I countries in the carbon markets developed by Annex I countries, beyond their current involvement through the Clean Development Mechanism (CDM). Sectora...
| Main Authors: | , , |
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| Format: | Technical Report |
| Language: | en_US |
| Published: |
MIT Joint Program
2013
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| Online Access: | http://hdl.handle.net/1721.1/79919 |
| _version_ | 1811081197589102592 |
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| author | Gavard, Claire Winchester, Niven Paltsev, Sergey |
| author_facet | Gavard, Claire Winchester, Niven Paltsev, Sergey |
| author_sort | Gavard, Claire |
| collection | MIT |
| description | In the negotiations of the United Nations Framework Convention on Climate Change (UNFCCC), new market mechanisms are proposed to involve Non-Annex I countries in the carbon markets developed by Annex I countries, beyond their current involvement through the Clean Development Mechanism (CDM). Sectoral trading is one such mechanism. It would consist of coupling one economic sector of a Non-Annex I country, e.g., the Chinese electricity sector, with the carbon market of some Annex I countries, e.g., the European Union Emission Trading Scheme (EU ETS). Previous research analyzed the potential impacts of such a mechanism and concluded that a limit would likely be set on the amount of carbon permits that could be imported from the non-Annex I country to the Annex I carbon market, should such a mechanism come into effect. This paper analyzes the impact of limited trading in carbon permits between the EU ETS and Chinese electricity sector when the latter is constrained by a 10% emissions reduction target below business as usual by 2030. The limit on the amount of Chinese carbon permits that could be sold into the European carbon market is modeled through the introduction of a trade certificate system. The analysis employs the MIT Emissions Prediction and Policy Analysis (EPPA) model and takes into account the banking–borrowing of allowances and the inclusion of aviation emissions in the EU ETS. We find that if the amount of permits that can be imported from China to Europe is 10% of the total amount of European allowances, the European carbon price decreases by 34%, while it decreases by 74 % when sectoral trading is not limited. As a consequence, limited sectoral trading does not reverse the changes initiated in the European electricity sector as much as unlimited sectoral trading would. We also observe that international leakage and leakage to non-electricity sectors in China are lower under limited sectoral trading, thus achieving more emissions reductions at the aggregate level. Finally, we find that, if China can capture the rents due to the limit on sectoral trading, it is possible to find a limit that makes both regions better off relative to when there is no international trade in carbon permits. |
| first_indexed | 2024-09-23T11:42:59Z |
| format | Technical Report |
| id | mit-1721.1/79919 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:42:59Z |
| publishDate | 2013 |
| publisher | MIT Joint Program |
| record_format | dspace |
| spelling | mit-1721.1/799192019-04-12T20:33:49Z Limited Sectoral Trading between the EU ETS and China Gavard, Claire Winchester, Niven Paltsev, Sergey In the negotiations of the United Nations Framework Convention on Climate Change (UNFCCC), new market mechanisms are proposed to involve Non-Annex I countries in the carbon markets developed by Annex I countries, beyond their current involvement through the Clean Development Mechanism (CDM). Sectoral trading is one such mechanism. It would consist of coupling one economic sector of a Non-Annex I country, e.g., the Chinese electricity sector, with the carbon market of some Annex I countries, e.g., the European Union Emission Trading Scheme (EU ETS). Previous research analyzed the potential impacts of such a mechanism and concluded that a limit would likely be set on the amount of carbon permits that could be imported from the non-Annex I country to the Annex I carbon market, should such a mechanism come into effect. This paper analyzes the impact of limited trading in carbon permits between the EU ETS and Chinese electricity sector when the latter is constrained by a 10% emissions reduction target below business as usual by 2030. The limit on the amount of Chinese carbon permits that could be sold into the European carbon market is modeled through the introduction of a trade certificate system. The analysis employs the MIT Emissions Prediction and Policy Analysis (EPPA) model and takes into account the banking–borrowing of allowances and the inclusion of aviation emissions in the EU ETS. We find that if the amount of permits that can be imported from China to Europe is 10% of the total amount of European allowances, the European carbon price decreases by 34%, while it decreases by 74 % when sectoral trading is not limited. As a consequence, limited sectoral trading does not reverse the changes initiated in the European electricity sector as much as unlimited sectoral trading would. We also observe that international leakage and leakage to non-electricity sectors in China are lower under limited sectoral trading, thus achieving more emissions reductions at the aggregate level. Finally, we find that, if China can capture the rents due to the limit on sectoral trading, it is possible to find a limit that makes both regions better off relative to when there is no international trade in carbon permits. The authors wish to thank Henry D. Jacoby for helpful comments and suggestions. The Joint Program on the Science and Policy of Global Change is funded by the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-FG02-93ER61677, DEFG02-08ER64597, and DE-FG02-06ER64320; the U.S. Environmental Protection Agency under grants XA-83344601-0, XA-83240101, XA-83042801-0, PI-83412601-0, RD-83096001, and RD-83427901-0; the U.S. National Science Foundation under grants SES-0825915, EFRI- 2013-08-22T16:27:47Z 2013-08-22T16:27:47Z 2013-08-21 Technical Report http://hdl.handle.net/1721.1/79919 Report 249 en_US MIT Joint Program Report Series;Report 249 application/pdf MIT Joint Program |
| spellingShingle | Gavard, Claire Winchester, Niven Paltsev, Sergey Limited Sectoral Trading between the EU ETS and China |
| title | Limited Sectoral Trading between the EU ETS and China |
| title_full | Limited Sectoral Trading between the EU ETS and China |
| title_fullStr | Limited Sectoral Trading between the EU ETS and China |
| title_full_unstemmed | Limited Sectoral Trading between the EU ETS and China |
| title_short | Limited Sectoral Trading between the EU ETS and China |
| title_sort | limited sectoral trading between the eu ets and china |
| url | http://hdl.handle.net/1721.1/79919 |
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