The impact of private investor’s transaction costs on the cost effectiveness of project-based Kyoto mechanisms

From a private investor’s point of view transaction costs of project-based Kyoto mechanisms relate mainly to project management and interaction with government representatives. However, when analysing the cost effectiveness of project-based Kyoto mechanisms these transaction costs are often underestimated or completely ignored¹ due to limited data availability. This paper presents an analysis of transaction costs of project-based Kyoto mechanisms by applying cost estimates from comparable activities, for example, activities implemented jointly (AIJ). The findings show that transaction costs of AIJ projects range between 7% and more than 100% of production costs with 80% of projects lying between 14 and 89%. Furthermore the data clearly illustrate that “bigger” projects have lower specific project costs indicating the existence of economies of scale. Due to the fact that high transaction costs will push many promising projects out of the market, efforts should be undertaken to reduce transaction costs by improving procedures and business environments, for example, by standardisation.     

Transaction costs for firms in the EU ETS: lessons from Ireland

Until now, there has been little empirical evidence that EU Emissions Trading Scheme (ETS) transaction costs are incurred at firm level. The transaction costs (internal costs, capital costs, consultancy and trading costs) incurred by Irish firms under the EU ETS during its pilot phase (2005–2007) were measured and analysed. Evidence for the sources of transaction costs, their magnitude and the distribution of costs shows that these were mainly administrative in nature. Considerable variation in costs was found due to economies of scale, as the costs per tonne of CO₂ were lower for participants with larger allocations. For the largest firms—accounting for over half the emissions—average transaction costs were €0.05 per tonne. However, for small firms, average transaction costs were €2.02—over 18% of the current allowance price. This supports the concerns that transaction costs are excessive for smaller participants. The immediate policy implication is that additional attention will be needed to address different sizes of firms, number of installations per firm, and the size of the initial allocations.     

The (ir)relevance of transaction costs in climate policy instrument choice: an analysis of the EU and the US

This article assesses the relevance of ex post transaction costs in the choice of climate policy instruments in the EU (focusing mainly on the example of Germany) and the US. It reviews all publicly available empirical ex post transaction cost studies of climate policy instruments broken down by the main private and public sector cost factors and offers hypotheses on how these factors may scale depending on instrument design and other contextual factors. The key finding from the evaluated schemes is that it is possible to reject the hypothesis that asymmetries in ex post transaction costs across instruments are large and, thus, play a pivotal role in climate policy instrument choice. Both total and relative ex post transaction costs can be considered low. This conjecture differs from the experience in other areas of environmental policy instruments where high total transaction costs are considered to be important factors in the overall assessment of optimal environmental policy choice. Against this background, the main claim of this article is that in climate policy instrument choice, ex post transaction cost considerations play a minor role in large countries that feature similar institutional characteristics as the EU and the US. Rather, the focus should be on the efficiency properties of instruments for incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives). In order to inform transaction cost considerations in climate policy instrument choice in countries that adopt new climate policies, more data would be desirable in order to enable more robust estimates of design- and context-specific transaction-cost scaling factors.

Policy relevance

The findings of this study can help inform policy makers who plan to set up novel climate policy instruments. The results indicate that ex post transaction costs play a minor role for large countries that feature similar institutional characteristics as the EU and the US. For instrument design the focus should rather be on efficiency properties of instruments in incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives).     

Transaction costs analysis of low-carbon technologies

Transaction costs (TCs) must be taken into account when assessing the performance of policy instruments that create markets for the diffusion and commercialization of low-carbon technologies (LCTs). However, there are no comprehensive studies on the development and application of transaction cost analysis to LCTs. In this meta-analysis, a wide-ranging evaluation of TCs associated with energy efficiency, renewable energy, and carbon market technologies is provided. There is a plethora of different definitions of, and measurement techniques to estimate, TCs. There is wide variation in the quantitative estimates, which can be attributed to factors such as the definition used, data collection, quantification methods, the type and size of technologies, the regulatory frameworks, the complexity of transactions, and the maturity of policy instruments. It is concluded that TCs are highly specific to both LCTs and policy instruments and that a common methodological approach is needed to avoid misleading policy analysis of the extant and future assessments.

Policy relevance

Transaction costs (TCs) accrued by, for instance, the search for information, due diligence, monitoring and verification (M&V) activities, must be considered in the design, implementation, and assessment of policy instruments. Such costs can have a negative effect on the performance of policy instruments aimed at the diffusion and commercialization of low-carbon technologies. It is shown here that TC analysis is mostly technology and policy context-specific and hence that it is not advisable to make generalizations about sources and estimates. The nature and scale of TCs are likely to differ due to a variety of endogenous determinants (e.g. size and performance of technologies), exogenous drivers (e.g. regulatory policy frameworks), and methodological aspects (e.g. quantification techniques). Several measures and strategies have the potential to reduce TCs, including standardized full cost accounting systems, an ex ante M&V approach, project bundling, and streamlining of procedures.     

Russian behaviour in the market for permits under the Kyoto Protocol

After the US withdrawal from the Kyoto Protocol and the extension of national quotas in the Bonn and Marrakesh agreements, meagre environmental effects and a low price of emission permits are likely to be the outcome of implementation. This paper attempts to analyze this scenario, mainly in relation to the Russian case. I discuss on the basis of certain key assumptions the strategic options open to the supply side of the permit market and Russia's potentially incompatible interests as a producer of oil and gas on the one hand and a dominating seller of emission permits under the Kyoto Protocol on the other. The analysis shows that Russian oil and gas interests are likely to boost Russia's inclination to sell permits, ultimately resulting in lower permit prices.     

Russian behaviour in the market for permits under the Kyoto Protocol

After the US withdrawal from the Kyoto Protocol and the extension of national quotas in the Bonn and Marrakesh agreements, meagre environmental effects and a low price of emission permits are likely to be the outcome of implementation. This paper attempts to analyze this scenario, mainly in relation to the Russian case. I discuss on the basis of certain key assumptions the strategic options open to the supply side of the permit market and Russia’s potentially incompatible interests as a producer of oil and gas on the one hand and a dominating seller of emission permits under the Kyoto Protocol on the other. The analysis shows that Russian oil and gas interests are likely to boost Russia’s inclination to sell permits, ultimately resulting in lower permit prices.     

The impact of administrative transaction costs in the EU emissions trading system

This article empirically investigates the impact of transaction costs for monitoring, reporting, and verification (MRV) of emissions on companies regulated by the EU Emissions Trading System (EU ETS) in Germany. Based on a unique panel dataset, we investigate if MRV costs are dependent on the amount of annual emissions of regulated companies and if there are differences in transaction costs between economic sectors. The results indicate that administrative costs are dependent on the amount of annual emissions for larger companies, which has implications for the economic efficiency of the EU ETS. The most important finding, however, is that there are significant differences in MRV transaction costs dependent on the type and size of companies. This implies the existence of considerable economies of scale. Overall, the EU ETS could benefit from reforms by means of a push towards upstream regulation as this would likely increase administrative efficiency.

Policy relevance statement

Transaction costs are, among other things, an important aspect of market-based climate policy design. A policy instrument with low transaction costs is preferred over instruments with larger transaction costs under equal conditions. This is occasionally referred to as administrative efficiency, and its importance was acknowledged in directive 2009/29/EC of the European Commission. Thoughtful empirical examination of transaction costs is essential in order to inform about the extent and impact of these costs. This article provides an analysis of transaction costs for monitoring, reporting, and verification (MRV) of emissions in the EU ETS. It is shown that administrative costs will likely have negative effects on the cost efficiency of the EU ETS. However, the most relevant finding is that small companies (<250 employees) or firms emitting small amounts of carbon dioxide per year face far higher average transaction costs compared with larger firms or emitters. Thus, there is a tendency for the EU ETS to cause MRV transaction costs that are disadvantageous for small companies. A regulation that is more upstream-oriented could mitigate this negative effect to some extent. The EU ETS could initiate a reform that is targeted on putting a price on the carbon content of fossil fuels instead of directly regulating emissions in a so-called ‘end-of-the-pipe’ way at the installation level.     

Reducing carbon transaction costs in community-based forest management

Abstract

The article considers the potential for community-based forest management (of existing forests) in developing countries, as a future CDM strategy, to sequester and mitigate carbon and to claim credits in future commitment periods. This kind of forestry is cost-effective, and should bring many more benefits to local populations than do afforestation and reforestation, thus contributing more strongly to sustainable development. However, community forest management projects are small-scale, and the transaction costs associated with justifying them as climate projects are likely to be high. A research project being carried out in five developing countries is testing carbon measurement and monitoring methods which can be carried out by community members with very little formal education, which should greatly reduce these transaction costs. Using hand-held computers with GIS capability and attached GPS, villagers with 4 years of primary education are able to accurately map their forest resource and input biomass data from sample plots into a program which calculates carbon values.     

Sequestration rental policies and price path of carbon

Abstract

Carbon rental has been suggested as a way of providing incentives to sequester carbon in biomass in the context of emissions trading systems for GHG emissions. A rental system works by issuing a credit for sequestered carbon that must be repaid after some fixed term. Rental systems avoid many of the difficulties of ensuring the permanence of sequestered carbon that exist in other institutional arrangements. This article adapts the results of Herzog et al. (2003) to argue that a rental system requires that carbon prices rise more slowly than the value of alternative investments in order to provide adequate incentives, and that there are good reasons to believe that this may not happen. Proponents need to directly address this potential difficulty in advancing arguments that carbon rental should be adopted as policy.     

The emperor's new clothes: redressing the Kyoto Protocol

Abstract

US President Bush repudiated the Kyoto Protocol because, in his view, it is ‘fatally flawed in fundamental ways’. This paper evaluates seven proposals to redress the protocol according to their potential to deal with three key issues that have reinforced US intransigence: hot air, cost uncertainty and developing country participation. It argues that negotiations on intensity targets hold the most promise. Because intensity targets limit hot air, but do not limit economic growth, and a high variance of carbon intensity exists among countries with similar GDP per capita, intensity targets based on best practice levels might be agreeable to developing countries and the US. If a protocol specifying such targets were implemented, less warming would be associated with larger world GDP than would otherwise be the case, and countries' carbon intensity and emissions per capita would tend to converge to best practice levels at every stage of development.     

Compliance of the Parties to the Kyoto Protocol in the first commitment period

This article provides an ex post analysis of the compliance of the Parties to the Kyoto Protocol during the first commitment period (2008–2012) based on the final data for national GHG emissions and exchanges in carbon units that became available at the end of 2015. On the domestic level, among the 36 countries that fully participated in the Kyoto Protocol, only nine countries emitted higher levels of GHGs than committed and therefore had to resort to flexibility mechanisms. On the international level – i.e. after the use of flexibility mechanisms – all Annex B Parties are in compliance. Countries implemented different compliance strategies: purchasing carbon units abroad, stimulating the domestic use of carbon credits by the private sector and incentivizing domestic emission reductions through climate policies.

Overall, the countries party to the Protocol surpassed their aggregate commitment by an average 2.4 GtCO₂e yr^–1. Of the possible explanations for this overachievement, ‘hot-air’ was estimated at 2.2 GtCO₂e yr^–1, while accounting rules for land use, land-use change and forestry (LULUCF) further removed 0.4 GtCO₂e yr^–1 from the net result excluding LULUCF. The hypothetical participation of the US and Canada would have reduced this overachievement by a net 1 GtCO₂e yr^–1. None of these factors – some of which may be deemed illegitimate – would therefore on its own have led to global non-compliance, even without use of the 0.3 GtCO₂e of annual emissions reductions generated by the Clean Development Mechanism. The impact of domestic policies and ‘carbon leakage’ – neither of which is quantitatively assessed here – should not be neglected either.

Policy relevance

Given the ongoing evolution of the international climate regime and the adoption of the Paris Agreement in December 2015, we believe that there is a need to evaluate the results of the first commitment period of the Kyoto Protocol. To our knowledge there has been no overarching quantitative ex post assessment of the Kyoto Protocol based on the final emissions data for 2008–2012, which became available in late 2015. This article attempts to fill this gap, focusing on the domestic and international compliance of the Parties to the Kyoto Protocol in the first commitment period.     

California RECLAIM's market failure: lessons for the Kyoto Protocol

Abstract

The failure of Los Angeles' RECLAIM emission trading market in the summer of 2000 uncovers important issues that have direct relevance for the various systems now emerging for exchanging greenhouse gas credits. Two primary causes for the breakdown of RECLAIM are apparent. On the one hand, RECLAIM did not succeed because of a series of unpredictable events that included manipulation of the market by brokers and the California energy shortage. On the other hand, several potentially foreseeable program design flaws contributed to the failure. This study examines the structure of RECLAIM and concludes that there was sufficient resilience to endure the two unexpected crises. However, the problematic program design features created a market that was fatally flawed and, regardless of impinging circumstances, was ultimately bound to collapse. We also investigate the status of the rapidly developing international greenhouse gas market and identify several lessons from the RECLAIM experience: the need for a holistic approach to market design that includes the role of a bank, the interface with project-based credits, the similarities of the industries enrolled in the program, and need to carefully consider how to handle the problems caused by the end of the trading period.     

Linking the CDM with domestic carbon markets

Certified emission reductions (CERs) from Clean Development Mechanism (CDM) projects have traditionally served as an indirect link between cap and trade systems around the world. However, since 2010, import restrictions have increased. Reasons for import limitations include the supplementarity principle, genuine concerns about the environmental integrity of CERs and social benefits of CDM projects, pressure from domestic emissions mitigation industries, concerns about competition in the industries in which reductions take place, as well as the attempt to pressure advanced developing countries to accept national emissions commitments under a future international climate policy regime. It is shown that import limitations lead to a decrease in CER prices and a race to generate CERs as quickly as possible. Such effects are visible in the CDM market after the EU announced its import limitations. The exclusion of CERs from specific project types will distort the CDM supply curve and increase the CER price unless the marginal abatement costs of the excluded project type are above the CER world market price. Similarly, exclusion of CERs from specific host countries will increase the price. Substantial differences are found in CER access to national carbon markets around the world.Policy relevanceCDM regulators could try to improve access of CERs to cap and trade schemes through improvements to additionality testing, standardizing baseline and monitoring methodologies and stakeholder consultation. However, regulators should be aware that standardization is no panacea, and controversies may resurface if standardized additionality determination (e.g. through benchmarks or positive lists) are applied for a certain period and found to be problematic. However, domestic policy concerns such as an unwillingness to send money abroad to buy credits, an inability to control market prices, and competitiveness impacts cannot be resolved by CDM reforms. If, despite such reforms of the CDM, blatant protectionism continues, a challenge before the World Trade Organisation (WTO) could be launched to stop discrimination of service exports from specific countries.     

Assessing the additionality of CDM projects: practical experiences and lessons learned

The Clean Development Mechanism (CDM) under the Kyoto Protocol allows industrialized countries to use credits from greenhouse gas (GHG) abatement projects in developing countries. A key requirement of the CDM is that the emission reductions be real, measurable and additional. This article evaluates how the additionality of CDM projects has been assessed in practice. The analysis is mainly based on a systematic evaluation of 93 registered CDM projects and comes to the conclusion that the current tools for demonstrating additionality are in need of substantial improvement. In particular, the application of the barrier analysis is highly subjective and difficult to validate in an objective and transparent manner. Key assumptions regarding additionality are often not substantiated with credible, documented evidence. In a considerable number of cases it is questionable whether the emission reductions are actually additional. Based on these findings, practical recommendations for improving the assessment of additionality are provided.     

Combining cap-and-trade with offsets: lessons from the EU-ETS

Linking a cap-and-trade with an offset mechanism has many theoretical advantages: it reduces compliance costs, extends the price signal outside the cap-and-trade, and triggers technology transfer. However, it is feared that such linking will induce outsourcing of emissions reduction at a low price and undermine the price incentive in the cap-and-trade. The EU Emissions Trading Scheme (EU ETS) is the first full-scale example of a cap-and-trade system linked to project-based mechanisms such that offsets have effectively been used by industrial installations. This article is an ex post analysis of EU ETS data for the years 2008 and 2009, and the characteristics of the link and its efficiency are evaluated. Although offsets have been much used, their use is concentrated and not very intense or frequent, which allays the fear that offsets will flood the market. Although the majority of surrendered CERs effectively come from the largest and oldest projects, the credits surrendered are similar to those available on the market. Possible factors that contribute towards inefficiency are the rules for using offsets, transaction costs affecting the participation of small installations, awareness and openness to market-based instruments, and uncertainties regarding CERs offer and demand from other markets. However, the impact on EUA equilibrium price still needs to be quantified.     

Transportation costs and the spatial distribution of land use in the Brazilian Amazon

We examine the question of whether reducing transport costs in the Amazon has lead to increased land clearing. Data on land clearing, transport costs and other related variables from 1975 to 1995 is analyzed using econometric approaches that exploit the dynamic time series dimension of the data to control for possible omitted variables and endogeneity. Our results suggest that the impact of changes in transport costs on clearing depends greatly on the initial land use. Specifically, we find that in regions where a greater proportion of the land is already cleared, reducing transport costs can lessen the rate of future clearing. On the other hand, reducing transport costs through areas that have seen little human activity is more likely to increase deforestation.     

Assessing the authenticity of national carbon prices: A comparison of 31 countries

Many countries have carbon pricing in place, in the form of a tax and/or market. Generally, this involves low price rates, incomplete emissions coverage, and price reductions for particular sectors. This raises the question whether the label “carbon price” – in the environmental-economics textbook sense – really applies. To answer it, we assess the authenticity of 31 national carbon prices, calculating average carbon prices and their gap with advertised prices, at both national and sector levels. The results indicate a poor level of authenticity. This means that the carbon prices published by sources such as the World Bank provide a misleading representation of the actual national policy pressure on emissions. Countries show considerable differences regarding the average carbon price level and the gap with advertised prices. Moreover, there is not a one-to-one relationship between advertised and average carbon prices, suggesting the former are not a good basis for international comparison of policy effectiveness. Across countries, the mean carbon price equals €7.90/ton of CO₂ while the mean price gap is 57.7%. Most noticeably, the highest advertised price for Sweden should be interpreted with care as it goes along with a price gap of almost €100 to the average price. In addition, Switzerland and Finland show relatively high price gaps. To illustrate the relevance and non-triviality of our indicators, note that Sweden occupies a 3rd position in terms of average carbon price (after Norway and Switzerland), 27th in terms of price gap, and 16th in terms of effective rate (i.e. sum of implicit and explicit carbon prices). We further find that implicit carbon prices dominate explicit ones for most countries, notably in road transport, whereas the reverse holds for industrial and electricity sectors. Combining our findings with recent empirical evidence for carbon-pricing effectiveness highlights the potential of the instrument to combat climate change, provided implementation is improved and internationally harmonized. Shifting the attention from advertised to average carbon prices might help in this regard.     

Anticipated economic costs and benefits of ratification of the Kyoto Protocol by the State of Qatar

Abstract

Further ratification of the Kyoto Protocol by non-Annex 1 countries such as the State of Qatar will not affect the entrance into force of the Treaty; however, ratification remains an important decision due to other considerations, primarily the economic costs and benefits associated with ratification. As a member of the Organization of Petroleum Exporting Countries (OPEC), Qatar's economic position is closely allied with revenue generated from its oil and natural gas resources. Qatar expects adverse impacts from implementing the Kyoto Protocol, though the estimated magnitude varies enormously with different models. Also, the impacts depend significantly on how the implementation is done; for example, the kind of policies that other countries use. Qatar is able to counter adverse impacts by exploiting its greater share of natural gas and developing energy-intensive industries that produce nonenergy goods such as steel, petrochemicals, and chemicals. Furthermore, it is clear that clauses in the Protocol can be developed to protect OPEC interests, and if Qatar does not ratify the Protocol, it will be excluded from the subsequent rule-making processes. On balance, there are benefits to ratifying the Treaty, and there is also a strong need for extensive further research.     

中国试点ETS的碳减排效果评估——基于分省高耗能工业子行业数据的分析

评估中国试点碳排放权交易体系(ETS)碳减排效果的现有研究普遍存在处理组样本选取范围明显大于试点ETS实际覆盖范围的问题。因此,文中对研究样本进行了更为严格的甄别：将2005—2017年各省的六大高耗能工业子行业中纳入试点企业的体量占相应子行业体量60%及以上的工业子行业作为处理组,将非试点地区的工业子行业作为对照组。基于双重差分法的分析表明,相较于对照组,试点ETS在启动后不仅促进了处理组工业子行业碳排放绝对量的下降,还促进了其碳排放强度的下降,说明试点ETS具有明显的碳减排效果。工业子行业的总产值和人均总产值分别与其碳排放量和碳排放强度呈现出一定的库兹涅茨曲线效应,工业子行业资产的流动性越强、盈利能力越强、面临的环境规制强度越大,越有利于碳减排。建议主管部门坚定依靠市场手段来控制温室气体排放,尽快将更多行业纳入全国ETS;另外,应提高体系运行相关数据的公开力度,定期对体系进行分析评估,并及时公布评估结果。     

Payments for Ecosystem Services (PES) in the face of external biophysical stressors

Economic instruments such as Payments for Ecosystem Services (PES) schemes are increasingly promoted to protect ecosystems (and their associated ecosystem services) that are threatened by processes of local and global change. Biophysical stressors external to a PES site, such as forest fires, pollution, sea level rise, and ocean acidification, may undermine ecosystem stability and sustained ecosystem service provision, yet their threats and impacts are difficult to account for within PES scheme design. We present a typology of external biophysical stressors, characterizing them in terms of stressor origin, spatial domain and temporal scale. We further analyse how external stressors can potentially impinge on key PES parameters, as they (1) threaten ecosystem service provision, additionality and permanence, (2) add challenges to the identification of PES providers and beneficiaries, and (3) add complexity and costs to PES mechanism design. Effective PES implementation under external stressors requires greater emphasis on the evaluation and mitigation of external stressors, and further instruments that can accommodate associated risks and uncertainties. A greater understanding of external stressors will increase our capacity to design multi-scale instruments to conserve important ecosystems in times of environmental change.