Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy
Emission permit trading is a centerpiece of the Kyoto Protocol which allows participating nations to trade and bank greenhouse gas permits under the Framework Convention on Climate Change. When market conditions evolve stochastically, emission trad...
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| Format: | Policy Research Working Paper |
| Language: | English |
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World Bank, Washington, DC
2012
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| Online Access: | http://documents.worldbank.org/curated/en/2007/04/7549905/uncertainty-matter-stochastic-dynamic-analysis-bankable-emission-permit-trading-global-climate-change-policy http://hdl.handle.net/10986/7070 |
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okr-10986-7070 |
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oai_dc |
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Digital Repository |
| institution_category |
Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ABATEMENT COSTS ACID RAIN AFFORDABLE ENERGY AGGREGATE EMISSION ALLOWANCE TRADING ANNUAL ELECTRICITY ANNUAL EMISSION ANNUAL EMISSIONS APPROACH AUCTION BIDDING CALCULATION CARBON CARBON DIOXIDE CARBON DIOXIDE EMISSION CARBON FUELS CARBON MARKET CARBON TRADING CLEAN AIR CLEAN AIR ACT CLEAN AIR ACT AMENDMENTS CLIMATE CHANGE CLIMATE CHANGE POLICY COAL COAL PRICE COAL PRICES COMPETITIVE EQUILIBRIUM COMPLIANCE COSTS CONSTANT RETURNS TO SCALE COST INCREASES DEMAND CURVE DEMAND FOR ELECTRICITY DEMAND FOR ENERGY DEMAND FUNCTIONS ELASTICITY OF DEMAND ELECTRIC UTILITY ELECTRICITY ELECTRICITY PRICE ELECTRICITY PRICES ELECTRICITY UTILITIES EMISSION EMISSION ABATEMENT EMISSION CAP EMISSION LEVEL EMISSION PERMIT EMISSION PERMITS EMISSION RATE EMISSION RATES EMISSION REDUCTION EMISSION REDUCTION GOALS EMISSION REDUCTIONS EMISSION STANDARD EMISSION TARGETS EMISSION TRADING EMISSIONS EMISSIONS REDUCTION EMISSIONS TARGETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE ENERGY MARKETS ENERGY SOURCE ENVIRONMENTAL ENVIRONMENTAL BENEFITS ENVIRONMENTAL POLICIES ENVIRONMENTAL POLICY ENVIRONMENTAL PROTECTION ENVIRONMENTAL PROTECTION AGENCY FIXED COSTS FOSSIL FOSSIL FUEL FRAMEWORK CONVENTION ON CLIMATE CHANGE FUEL FUEL COSTS FUEL PRICES FUEL SWITCHING FUELS GENERATING CAPACITY GLOBAL CARBON DIOXIDE GLOBAL CARBON MARKET GLOBAL CLIMATE CHANGE GREENHOUSE GREENHOUSE GAS GREENHOUSE GAS PERMITS GREENHOUSE GASES HEAT HEAT INPUT HIGH-SULFUR HIGH-SULFUR COAL IMPERFECT COMPETITION INCREASES INPUT PRICES IRREVERSIBILITY LEVEL OF EMISSIONS LOW-SULFUR LOW-SULFUR COAL MARGINAL ABATEMENT MARGINAL ABATEMENT COST MARGINAL ABATEMENT COSTS MARGINAL COST MARGINAL EMISSION RATE MARGINAL PRODUCT MARGINAL PRODUCTIVITY MARGINAL REVENUE MARKET CONDITIONS MARKET POSITION MARKET POWER MARKET PRICE MARKET STRUCTURE OIL OPTIMIZATION MODEL PEAK LOAD PEAK POWER PERMIT PRICE PERMIT TRADING PLANT OPERATORS POLLUTANT EMISSIONS POLLUTION POLLUTION REDUCTION POWER POWER INDUSTRY POWER PLANT POWER PLANTS POWER PRODUCERS PRESENT VALUE PRICE CHANGE PRICE CHANGES PRICE DECREASES PRICE FLUCTUATION PRICE FLUCTUATIONS PRICE INCREASES PRICE LEVELS PRICE TRENDS PRICE UNCERTAINTIES PRICE UNCERTAINTY PRICE VOLATILITY PRODUCTION TECHNOLOGY PURCHASING REDUCING EMISSIONS REDUCTION OF EMISSIONS RETAIL RETAIL ELECTRICITY RETURNS TO SCALE SPOT MARKET SPOT MARKETS SPREAD STOCKS SUBSTITUTION SULFUR SULFUR DIOXIDE TOTAL EMISSIONS TRADABLE EMISSION UTILITY UNITS VOLATILE ENERGY |
| spellingShingle |
ABATEMENT COSTS ACID RAIN AFFORDABLE ENERGY AGGREGATE EMISSION ALLOWANCE TRADING ANNUAL ELECTRICITY ANNUAL EMISSION ANNUAL EMISSIONS APPROACH AUCTION BIDDING CALCULATION CARBON CARBON DIOXIDE CARBON DIOXIDE EMISSION CARBON FUELS CARBON MARKET CARBON TRADING CLEAN AIR CLEAN AIR ACT CLEAN AIR ACT AMENDMENTS CLIMATE CHANGE CLIMATE CHANGE POLICY COAL COAL PRICE COAL PRICES COMPETITIVE EQUILIBRIUM COMPLIANCE COSTS CONSTANT RETURNS TO SCALE COST INCREASES DEMAND CURVE DEMAND FOR ELECTRICITY DEMAND FOR ENERGY DEMAND FUNCTIONS ELASTICITY OF DEMAND ELECTRIC UTILITY ELECTRICITY ELECTRICITY PRICE ELECTRICITY PRICES ELECTRICITY UTILITIES EMISSION EMISSION ABATEMENT EMISSION CAP EMISSION LEVEL EMISSION PERMIT EMISSION PERMITS EMISSION RATE EMISSION RATES EMISSION REDUCTION EMISSION REDUCTION GOALS EMISSION REDUCTIONS EMISSION STANDARD EMISSION TARGETS EMISSION TRADING EMISSIONS EMISSIONS REDUCTION EMISSIONS TARGETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE ENERGY MARKETS ENERGY SOURCE ENVIRONMENTAL ENVIRONMENTAL BENEFITS ENVIRONMENTAL POLICIES ENVIRONMENTAL POLICY ENVIRONMENTAL PROTECTION ENVIRONMENTAL PROTECTION AGENCY FIXED COSTS FOSSIL FOSSIL FUEL FRAMEWORK CONVENTION ON CLIMATE CHANGE FUEL FUEL COSTS FUEL PRICES FUEL SWITCHING FUELS GENERATING CAPACITY GLOBAL CARBON DIOXIDE GLOBAL CARBON MARKET GLOBAL CLIMATE CHANGE GREENHOUSE GREENHOUSE GAS GREENHOUSE GAS PERMITS GREENHOUSE GASES HEAT HEAT INPUT HIGH-SULFUR HIGH-SULFUR COAL IMPERFECT COMPETITION INCREASES INPUT PRICES IRREVERSIBILITY LEVEL OF EMISSIONS LOW-SULFUR LOW-SULFUR COAL MARGINAL ABATEMENT MARGINAL ABATEMENT COST MARGINAL ABATEMENT COSTS MARGINAL COST MARGINAL EMISSION RATE MARGINAL PRODUCT MARGINAL PRODUCTIVITY MARGINAL REVENUE MARKET CONDITIONS MARKET POSITION MARKET POWER MARKET PRICE MARKET STRUCTURE OIL OPTIMIZATION MODEL PEAK LOAD PEAK POWER PERMIT PRICE PERMIT TRADING PLANT OPERATORS POLLUTANT EMISSIONS POLLUTION POLLUTION REDUCTION POWER POWER INDUSTRY POWER PLANT POWER PLANTS POWER PRODUCERS PRESENT VALUE PRICE CHANGE PRICE CHANGES PRICE DECREASES PRICE FLUCTUATION PRICE FLUCTUATIONS PRICE INCREASES PRICE LEVELS PRICE TRENDS PRICE UNCERTAINTIES PRICE UNCERTAINTY PRICE VOLATILITY PRODUCTION TECHNOLOGY PURCHASING REDUCING EMISSIONS REDUCTION OF EMISSIONS RETAIL RETAIL ELECTRICITY RETURNS TO SCALE SPOT MARKET SPOT MARKETS SPREAD STOCKS SUBSTITUTION SULFUR SULFUR DIOXIDE TOTAL EMISSIONS TRADABLE EMISSION UTILITY UNITS VOLATILE ENERGY Zhang, Fan Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| relation |
Policy Research Working Paper; No. 4215 |
| description |
Emission permit trading is a centerpiece
of the Kyoto Protocol which allows participating nations to
trade and bank greenhouse gas permits under the Framework
Convention on Climate Change. When market conditions evolve
stochastically, emission trading produces a dynamic problem,
in which anticipation about the future economic environment
affects current banking decisions. In this paper, the author
explores the effect of increased uncertainty over future
output prices and input costs on the temporal distribution
of emissions. In a dynamic programming setting, a permit
price is a convex function of stochastic prices of
electricity and fuel. Increased uncertainty about future
market conditions increases the expected permit price and
causes a risk-neutral firm to reduce ex ante emissions so as
to smooth out marginal abatement costs over time. The
convexity results from the asymmetric impact of changes in
counterfactual emissions on the change of marginal abatement
costs. Empirical analysis corroborates the theoretical
prediction. The author finds that a 1 percent increase in
electricity price volatility measured by the annualized
standard deviation of percentage price change is associated
with an average decrease in the annual emission rate by 0.88
percent. Numerical simulation suggests that high uncertainty
could induce substantially early abatements, as well as
large compliance costs, therefore imposing a tradeoff
between environmental benefits and economic efficiency. The
author discusses policy implications for designing an
effective and efficient global carbon market. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Zhang, Fan |
| author_facet |
Zhang, Fan |
| author_sort |
Zhang, Fan |
| title |
Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| title_short |
Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| title_full |
Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| title_fullStr |
Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| title_full_unstemmed |
Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy |
| title_sort |
does uncertainty matter? a stochastic dynamic analysis of bankable emission permit trading for global climate change policy |
| publisher |
World Bank, Washington, DC |
| publishDate |
2012 |
| url |
http://documents.worldbank.org/curated/en/2007/04/7549905/uncertainty-matter-stochastic-dynamic-analysis-bankable-emission-permit-trading-global-climate-change-policy http://hdl.handle.net/10986/7070 |
| _version_ |
1764401840489758720 |
| spelling |
okr-10986-70702021-04-23T14:02:33Z Does Uncertainty Matter? A Stochastic Dynamic Analysis of Bankable Emission Permit Trading for Global Climate Change Policy Zhang, Fan ABATEMENT COSTS ACID RAIN AFFORDABLE ENERGY AGGREGATE EMISSION ALLOWANCE TRADING ANNUAL ELECTRICITY ANNUAL EMISSION ANNUAL EMISSIONS APPROACH AUCTION BIDDING CALCULATION CARBON CARBON DIOXIDE CARBON DIOXIDE EMISSION CARBON FUELS CARBON MARKET CARBON TRADING CLEAN AIR CLEAN AIR ACT CLEAN AIR ACT AMENDMENTS CLIMATE CHANGE CLIMATE CHANGE POLICY COAL COAL PRICE COAL PRICES COMPETITIVE EQUILIBRIUM COMPLIANCE COSTS CONSTANT RETURNS TO SCALE COST INCREASES DEMAND CURVE DEMAND FOR ELECTRICITY DEMAND FOR ENERGY DEMAND FUNCTIONS ELASTICITY OF DEMAND ELECTRIC UTILITY ELECTRICITY ELECTRICITY PRICE ELECTRICITY PRICES ELECTRICITY UTILITIES EMISSION EMISSION ABATEMENT EMISSION CAP EMISSION LEVEL EMISSION PERMIT EMISSION PERMITS EMISSION RATE EMISSION RATES EMISSION REDUCTION EMISSION REDUCTION GOALS EMISSION REDUCTIONS EMISSION STANDARD EMISSION TARGETS EMISSION TRADING EMISSIONS EMISSIONS REDUCTION EMISSIONS TARGETS EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE ENERGY MARKETS ENERGY SOURCE ENVIRONMENTAL ENVIRONMENTAL BENEFITS ENVIRONMENTAL POLICIES ENVIRONMENTAL POLICY ENVIRONMENTAL PROTECTION ENVIRONMENTAL PROTECTION AGENCY FIXED COSTS FOSSIL FOSSIL FUEL FRAMEWORK CONVENTION ON CLIMATE CHANGE FUEL FUEL COSTS FUEL PRICES FUEL SWITCHING FUELS GENERATING CAPACITY GLOBAL CARBON DIOXIDE GLOBAL CARBON MARKET GLOBAL CLIMATE CHANGE GREENHOUSE GREENHOUSE GAS GREENHOUSE GAS PERMITS GREENHOUSE GASES HEAT HEAT INPUT HIGH-SULFUR HIGH-SULFUR COAL IMPERFECT COMPETITION INCREASES INPUT PRICES IRREVERSIBILITY LEVEL OF EMISSIONS LOW-SULFUR LOW-SULFUR COAL MARGINAL ABATEMENT MARGINAL ABATEMENT COST MARGINAL ABATEMENT COSTS MARGINAL COST MARGINAL EMISSION RATE MARGINAL PRODUCT MARGINAL PRODUCTIVITY MARGINAL REVENUE MARKET CONDITIONS MARKET POSITION MARKET POWER MARKET PRICE MARKET STRUCTURE OIL OPTIMIZATION MODEL PEAK LOAD PEAK POWER PERMIT PRICE PERMIT TRADING PLANT OPERATORS POLLUTANT EMISSIONS POLLUTION POLLUTION REDUCTION POWER POWER INDUSTRY POWER PLANT POWER PLANTS POWER PRODUCERS PRESENT VALUE PRICE CHANGE PRICE CHANGES PRICE DECREASES PRICE FLUCTUATION PRICE FLUCTUATIONS PRICE INCREASES PRICE LEVELS PRICE TRENDS PRICE UNCERTAINTIES PRICE UNCERTAINTY PRICE VOLATILITY PRODUCTION TECHNOLOGY PURCHASING REDUCING EMISSIONS REDUCTION OF EMISSIONS RETAIL RETAIL ELECTRICITY RETURNS TO SCALE SPOT MARKET SPOT MARKETS SPREAD STOCKS SUBSTITUTION SULFUR SULFUR DIOXIDE TOTAL EMISSIONS TRADABLE EMISSION UTILITY UNITS VOLATILE ENERGY Emission permit trading is a centerpiece of the Kyoto Protocol which allows participating nations to trade and bank greenhouse gas permits under the Framework Convention on Climate Change. When market conditions evolve stochastically, emission trading produces a dynamic problem, in which anticipation about the future economic environment affects current banking decisions. In this paper, the author explores the effect of increased uncertainty over future output prices and input costs on the temporal distribution of emissions. In a dynamic programming setting, a permit price is a convex function of stochastic prices of electricity and fuel. Increased uncertainty about future market conditions increases the expected permit price and causes a risk-neutral firm to reduce ex ante emissions so as to smooth out marginal abatement costs over time. The convexity results from the asymmetric impact of changes in counterfactual emissions on the change of marginal abatement costs. Empirical analysis corroborates the theoretical prediction. The author finds that a 1 percent increase in electricity price volatility measured by the annualized standard deviation of percentage price change is associated with an average decrease in the annual emission rate by 0.88 percent. Numerical simulation suggests that high uncertainty could induce substantially early abatements, as well as large compliance costs, therefore imposing a tradeoff between environmental benefits and economic efficiency. The author discusses policy implications for designing an effective and efficient global carbon market. 2012-06-04T21:35:24Z 2012-06-04T21:35:24Z 2007-04 http://documents.worldbank.org/curated/en/2007/04/7549905/uncertainty-matter-stochastic-dynamic-analysis-bankable-emission-permit-trading-global-climate-change-policy http://hdl.handle.net/10986/7070 English Policy Research Working Paper; No. 4215 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |