Carbon permit prices in the European emissions trading system : a stochastic analysis

The Emission Trading Scheme (ETS) is a cornerstone for European efforts to reduce greenhouse gas emissions, and in its test phase will operate from 2005-2007. It is a cap-and-trade system where an aggregate cap on emissions is set by the respective government agencies to define the total number of emissions allowances. Each allowance gives the owner the right to emit one unit (usually one ton) of emissions. Covered establishments that exceeded the limits may buy emissions credits from entities with allowances they do not need to use themselves. One key feature of this system is that the amount of emissions is capped whereas the permit prices are uncertain. These permit prices are determined by economic conditions, generally, stronger economic growth means a higher permit price. The objective of this thesis is to understand uncertainty in permit prices under the system, by determining the likelihood that permit prices will fall within a given range. This is accomplished through stochastic analysis simulation of a computable general equilibrium model of the world economy with country-level detail most of the key members of the original 15 member EU plus the 10 accession countries. Economic parameters treated as stochastic in the simulations were labor productivity growth, share of new capital vintaged, the rate of autonomous energy efficiency improvement, the elasticity of substitution between energy and non-energy composites, and oil/gas prices. Information on the likely range of future permit prices will allow operators of covered establishments to decide on the extent to which they should buy permits or invest in emissions reduction technologies possible reducing emissions below their cap, allowing them to sell allowances.

Department dc:contributor.department

Massachusetts Institute of Technology. Technology and Policy Program.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2005

Author dc:creator

• See, Wee Chiang

Advisor dc:contributor.advisor

• John M. Reilly.

• Technology and Policy Program.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/32293

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/32293