Integrated Emission Trading and Abatement (ETA) Model

 

ETA model is an integrated stochastic emissions trading and abatement model allowing to analyze the robustness of emissions reduction policies under asymmetric information about emission trading parties, uncertainties of emissions and other inherent anthropogenic and natural uncertainties. 

About ETA model

ETA model is an exploratory market environment for carbon emissions trading. It allows trading parties (countries or emitting entities) to investigate the conditions of their cost-efficient trades and emissions abatements. The model suggests cost efficient and environmentally safe equilibrium solution that can be implemented in reality. Functioning of the robust market is illustrated with numerical results involving such countries as US, Australia, Canada, Japan, EU27, Russia, Ukraine.

Key questions the model addresses:

  • Under which conditions is carbon trading environmentally safe and cost-effective in the long-term, if considered in the context of a stochastic market?
  • How the knowledge about uncertainties may affect portfolios of technological and trade policies of the parties?
  • If uncertainties may affect the structure of the market?
  • By how much differ marginal abatement costs calculated from technology parameters and the spot carbon price in the existing stochastic market?
  • By how much trading Parties may decrease the chances of lock-in solutions and “irreversible” trades at spot market?

How ETA works

FAST FACTS

  • ETA model has been developed within a framework of IIASA GGI project “A prototype model of robust emissions trading market under uncertainties”, a collaborative activity of IIASA’s Greenhouse Gas Initiative between ASA, ESM, and MAG programs.
  • ETA model links into IIASA research activities studying implications of uncertainties on environment, water, food, energy security.
  • ETA model is a market model for pricing limited resources under competition and uncertainties, e.g., water, land, environment, to avoid their uncontrollable use.

ETA model is a prototype model of emission trading market. It creates a computer-based modeling environment which allows trading “parties” to store in an anonymous manner their private information on cost functions, constraints, and other characteristics including specific characteristics of uncertainties. The procedure deriving equilibrium solution is the following: two parties are picked at random (“meet”) and exchange emission permits in a mutually beneficial way accounting for actual costs and uncertainties. At the next step, a new pair is picked and the procedure is repeated. At each step of the bilateral trades, the actual costs will differ between the sequential trades, but finally the trading converges to an equilibrium solution with marginal costs of all parties equal to an equilibrium price. The model derives the solution in a decentralized manner without revealing information of the parties.

Background

The international emission trading (IET) scheme under the Kyoto protocol was devised to lower the cost of achieving sets of greenhouse gas emission reductions for different countries with the price of tradable emissions equal to the marginal cost of emissions reductions to meet the cap. However IET was implemented through a market similar to financial markets. “Disequilibrium” carbon prices exhibit periods of high volatility. They react to and are the result of political decisions, information disclosure, speculations, bubbles, uncertainties around emissions and emissions reduction costs. The underlying, actual cost of GHG reduction, i.e. the marginal costs of abatement technologies is only of secondary importance. The existing emission trading, therefore, does not necessarily minimize abatement costs and achieve emission reduction goals. ETA model supports decisions regarding a trade-off between technological and economic mitigation and adaptation measures to reduce CO2 emissions and combat climate change without compromising economic development goals.

Challenges:

ETA model determines emissions permits prices in a decentralized manner without requiring trading parties to reveal or exchange their private information. The pricing methodology is augmented with environmental constraints.

The methodology of emissions pricing in the presence of uncertainties and incomplete information is a rather general scheme which has analogues with Walras law describing the dynamics of prices under specific market conditions, which finally converge to the optimal (equilibrium) prices. 

ETA incorporates concepts of emissions detectability (verifiability) and discounting. 

ETA integrates GAINS model data and results for USA, EU27, Australia, Canada, Japan, Russia, Ukraine and other countries. 



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Last edited: 22 July 2013

CONTACT DETAILS

Tatiana Ermolieva

Research Scholar

Ecosystems Services and Management

T +43(0) 2236 807 581

International Institute for Applied Systems Analysis (IIASA)
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