Emissions trading with non signatories in a climate agreement

Transcription

1 Emissions trading with non signatories in a climate agreement An analysis of coalition stability 2 1 Kai Lessmann* Ottmar Edenhofer* Robert Marschinski* Michael Finus WCERE 2010, Montreal C * Potsdam Institute for Climate Impact Research University of Exeter Business School Kai Lessmann, WCERE 2010 Montreal 1

2 International Environmental Agreements (IEA) Coalition formation: two stage game Stage 1: Membership game Players either sign the IEA or do not credit supplier remains impartial permit trade 2 coalition Internal/external stability ( Carraro/Siniscalco 1993) Stage 2: Emission game Players decide on investments ( emission trajectories) and trade ( allowances choice) Partial Agreement Nash Equilibrium ( Chander/Tulkens 1995) 4 non-member credit supplier Our aim: Design permit trade with non members ( ) to improve the IEA credit trade C Kai Lessmann, WCERE 2010 Montreal 2

3 Modeling Endogenous Allowance Choices Trading allowances: net permit exports = allowances emissions allowances, emissions tradable credits x allowance choice q emissions e permit trade 2 coalition 1 time Choose q > e to sell credits q < e to import credits 3 4 non-member 5 credit supplier credit trade C q low to reduce global warming, as total allowances cause damages Additionality trader must reduce below no trade baseline no hot air Cf. Helm (2003) JPE, Carbone, Helm and Rutherford (2009) JEEM Kai Lessmann, WCERE 2010 Montreal 3

4 Model of International Climate Agreements (MICA) Model builds on Lessmann et al. 2009, Lessmann/Edenhofer 2010 Economic dynamics: Regions maximize intertemporal welfare (cf. Nordhaus' RICE) permit trade 1 2 coalition Trade in one good and emission allowances 3 Eight symmetric regions + supplier 4 welfare credit trade Climate dynamics: emissions concentration temperature climate change damages labor efficiency consumption output labor capital emission intensity mitigation C Data: global aggregates calibrated to common scenarios Kai Lessmann, WCERE 2010 Montreal 4

5 Impact on Coalition Stability Stability Functions Stability Function: inside payoff outside payoff Largest stable coalition: 2 No baseline Coalition Size Kai Lessmann, WCERE 2010 Montreal 5

6 Impact on Coalition Stability (2) Stability Functions Stability Function: inside payoff outside payoff Largest stable coalition: 2 No Introduction of stability decreased coalition size 2 remains Why? Coalition Size Kai Lessmann, WCERE 2010 Montreal 6

7 Impact on Coalition Stability (3) Stability Functions Global Emissions No No Coalition Size Coalition Size More abatement in coalition reduced global emissions Stronger incentive to free ride Kai Lessmann, WCERE 2010 Montreal 7

8 Improving Design Two approaches to (maybe) overcome this negative result: Selling targets Idea: Shift the gains from trade to the coalition Impose more stringent upper bounds on -trader s allowance choice CEA trade trader allowances Idea: Negotiate trade after coalition formation trade ensure cost effectiveness (but is not part of the cost/benefit trade-off in the allowance choice) tradable credits time no trade selling target allowance choice Coalition allowances no lower than no trade CEA constraint Kai Lessmann, WCERE 2010 Montreal 8 time no trade

9 Selling targets: Welfare effects No selling targets: welfare gains from trade for -trader ( ) Non-member ( ) Selling targets shift welfare gains from trader to Members, leaving Non members unaffected free riding incentive remains high trader gain < 0: not profitable no trade Trade off: profitability vs. stability fixed coalition size of 6 Kai Lessmann, WCERE 2010 Montreal 9

10 Selling targets: Stability vs. Profitability Selling Target stable coalitions profitable trade Coalition Size Selling targets work in principle, but are restricted by non-profitability Kai Lessmann, WCERE 2010 Montreal 10

11 CEA : Coalition Stability Stability Functions Stability is improved, but the effect remains small CEA This may be due to relatively small volume of trade Boost trade by introducing some heterogeneity No Coalition Size Kai Lessmann, WCERE 2010 Montreal 11

12 CEA : Introducing Heterogeneity Coalition (all members) -trader Contribution to Abatement SYMMETRIC MB C MB i MC i MC i MB i SYMMETRIC 17% Abatement NO TRADE for A Abatement a 5 player coalition Kai Lessmann, WCERE 2010 Montreal 12

13 CEA : Introducing Heterogeneity Coalition (all members) -trader Contribution to Abatement SYMMETRIC MB C MB i MC i MC i MB i SYMMETRIC 17% Abatement Abatement HETEROGENEOUS MB C MB i MC i MC i MB i HETEROGENEOUS 67% Abatement NO TRADE A Abatement for a 5 player coalition Kai Lessmann, WCERE 2010 Montreal 13

14 CEA : Results from heterogeneous players Stability Functions Stability and profitability of trade CEA stable coalitions No baseline Selling target profitable trade Coalition Size Coalition Size Kai Lessmann, WCERE 2010 Montreal 14

15 CEA : Welfare implication of hot air % of social optimum with additionality with hot air Positive effect of trade on treaty participation increases with traded volume (heterogeneity) Net effect of hot air ambiguous: dillutes the agreement and thus causes welfare loss improves participation which may outweigh the welfare loss Degree of Heterogeneity Kai Lessmann, WCERE 2010 Montreal 15

16 Summary 1. Depending on its design, may discourage participation (CBA) or may foster participation (CEA) 2. Selling targets may help the agreement in two ways: by shifting welfare gains of trade to coalition members (CBA) by stabilizing a dilluted agreement by allowing hot air (CEA) 3. Large enough differential, large credit trade volume necessary Kai Lessmann, WCERE 2010 Montreal 16

17 Thank your for your time. Kai Lessmann, WCERE 2010 Montreal 17