Carbon emission trading and carbon taxes under uncertainties (original) (raw)

Abstract

The idea of market-based carbon emission trading and carbon taxes is gaining in popularity as a global climate change policy instrument. However, these mechanisms might not necessarily have a positive outcome unless their value reflects socioeconomic and environmental impacts and regulations. Moreover, the fact that they have various inherent exogenous and endogenous uncertainties raises serious concerns about their ability to reduce emissions in a cost-effective way. This paper aims to introduce a simple stochastic model that allows the robustness of economic mechanisms for emission reduction under multiple natural and human-related uncertainties to be analyzed. Unlike standard equilibrium state analysis, the model shows that the explicit introduction of uncertainties regarding emissions, abatement costs, and equilibrium states makes it almost impossible for existing market-based trading and carbon taxes to be environmentally safe and cost-effective. Here we propose a computerized multi-agent trading model. This can be viewed as a prototype to simulate an emission trading market that is regulated in a decentralized way. We argue that a market of this type is better equipped to deal with long-term emission reductions, their direct regulation, irreversibility, and “lock-in” equilibria.

Access this article

Log in via an institution

Subscribe and save

• Starting from 10 chapters or articles per month
• Access and download chapters and articles from more than 300k books and 2,500 journals
• Cancel anytime View plans

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

• Baumol W, Oates W (1971) The use of standards and prices for protection of the environment. Swed J Econ 73:42–54
  Article Google Scholar
• EEA (2006) Application of the emission trading directive by EU Member States. Technical Report No. 2/2006, European Environment Agency (EEA), Denmark, p 54. http://reports.eea.europa.eu/technical_report_2006_2/en/technicalreport_2_2006.pdf
• Energy Business Review (2006) Volatility the only certainty in EU carbon market. http://www.energy-business-review.com/article_feature.asp?guid=FD09D7CA-3EFC-4229-BA86-1D968025DF5B
• Ermoliev Y, Michalevich M, Nentjes A (2000) Markets for tradable emission and ambient permits: a dynamic approach. Environ Res Econ 15:39–56
  Article Google Scholar
• Ermolieva T, Ermoliev Y (2005) Catastrophic risk management: flood and seismic risks case studies. In: Wallace SW, Ziemba WT (eds) Applications of stochastic programming. MPS-SIAM Series on Optimization, Philadelphia
• Ermolieva T, Jonas M, Ermoliev Y, Makowski M (2007) The difference between deterministic and probabilistic detection of emission changes: toward the use of the probabilistic verification time concept. In: Proc. of the 2nd international workshop on uncertainty in greenhouse gas inventories, IIASA-Systems Research Institute of the Polish academy of Sciences. http://www.iiasa.ac.at/Research/FOR/unc_prep.html
• Godal O, Ermoliev Y, Klassen G, Obersteiner M (2003) Carbon trading with imperfectly observable emissions. Environ Res Econ 25:151–169
  Article Google Scholar
• Hudz H (2002) Verification times underlying the Kyoto protocol: consideration of risk. Interim Report IR-02-066, International Institute for Applied Systems Analysis, Laxenburg, Austria. http://www.iiasa.ac.at/Publications/Documents/IR-02-066.pdf
• Hudz H, Jonas M, Ermolieva T, Bun R, Ermoliev Y, Nilsson S (2003) Verification times underlying the Kyoto protocol: consideration of risk. Background data for IR-02-066, International Institute for Applied Systems Analysis, Laxenburg, Austria. http://www.iiasa.ac.at/Research/FOR/vt_concept.html
• Jonas M, Nilsson S (2007) Prior to economic treatment of emissions and their uncertainties under the Kyoto Protocol: scientific uncertainties that must be kept in mind. Water Air Soil Pollut Focus 7(4–5):495–511. doi:10.1007/s11267-006-9113-7
  Article Google Scholar
• Jonas M, Nilsson S, Obersteiner M, Gluck M, Ermoliev Y (1999) Verification times underlying the Kyoto protocol: global benchmark calculations. Interim Report IR 99-062, International Institute for Applied Systems Analysis, Laxenburg, Austria, p 43. http://www.iiasa.ac.at/Publications/Documents/IR-99-062.pdf
• Lieberman D, Jonas M, Nahorski Z, Nilsson S (eds) (2007) Accounting for climate change. Uncertainty in greenhouse gas inventories—verification, compliance, and trading. Springer, Dordrecht, pp 159, ISBN: 978-1-4020-5929-2 [Reprint: Water Air Soil Pollut.: Focus, 2007, 7(4–5), ISSN: 1567-7230]. http://www.springer.com/environment/global+change+-+climate+change/book/978-1-4020-5929-2
• Marland G (2008) Uncertainties in accounting for CO2 from fossil fuels. J Ind Ecol 12(2):136–139. doi:10.1111/j.1530-9290.2008.00014.x
  Article Google Scholar
• Nahorski Z, Jeda W, Jonas M (2003) Coping with uncertainty in verification of the Kyoto obligations. In: Studzinski J, Drelichowski L, Hryniewicz O (eds) Zastosowania informatyki i analizy systemowej w zarządzaniu. Systems Research Institute PAS, Warsaw, pp 305–317
  Google Scholar
• Nahorski Z, Horabik J, Jonas M (2007) Compliance and emissions trading under the Kyoto protocol: rules for uncertain inventories. In: Lieberman D, Jonas M, Nahorski Z, Nilson S (eds) Accounting for climate change: uncertainty in greenhouse gas inventories—verification, compliance, and trading. Springer, Heidelberg, pp 119–138
  Google Scholar
• Rockafellar T, Uryasev S (2000) Optimization of conditional-value-at-risk. J Risk 2/3:21–41
  Google Scholar
• Rypdal K, Winiwarter W (2000) Uncertainties in greenhouse gas emission inventories evaluation, comparability and implications. Environ Sci Policy 4:107–116
  Article Google Scholar
• Winiwarter W (2007) National greenhouse gas inventories: understanding uncertainties versus potential for improving reliability. In: Lieberman D, Jonas M, Nahorski Z, Nilson S (eds) Accounting for climate change: uncertainty in greenhouse gas inventories—verification, compliance, and trading. Springer, Heidelberg, pp 23–30
  Google Scholar

Download references

Author information

Authors and Affiliations

1. International Institute for Applied Systems Analysis, Schlossplatz 1, 2361, Laxenburg, Austria
   Tatiana Ermolieva, Yuri Ermoliev, Günther Fischer, Matthias Jonas, Marek Makowski & Fabian Wagner

Authors

1. Tatiana Ermolieva
2. Yuri Ermoliev
3. Günther Fischer
4. Matthias Jonas
5. Marek Makowski
6. Fabian Wagner

Corresponding author

Correspondence toTatiana Ermolieva.

Rights and permissions

About this article

Cite this article

Ermolieva, T., Ermoliev, Y., Fischer, G. et al. Carbon emission trading and carbon taxes under uncertainties.Climatic Change 103, 277–289 (2010). https://doi.org/10.1007/s10584-010-9910-x

Download citation

• Received: 05 January 2009
• Accepted: 15 June 2010
• Published: 16 July 2010
• Issue date: November 2010
• DOI: https://doi.org/10.1007/s10584-010-9910-x

Keywords