Figure 7. Willingness to Import / Export with Regard to Market Price of Permits.

For whatever market one is considering, we simply add up the quantities (x-axis) potentially supplied and those potentially demanded at each price (y-axis) across the constituent regions. As we vary the price, we describe the demand and the supply curves for this market, and their intersection indicates the market clearing price on the y-axis and the total quantity traded in that market on the x-axis. Examples of aggregate demand and supply curves for the Annex B and global markets will be introduced subsequently.

3. CASE STUDIES OF PERFECTLY COMPETITIVE TRADING

As a first step in illustrating how the cost of meeting Kyoto commitments for different regions is affected by emissions trading, we consider a simple case consisting of only the four OECD regions (USA, JPN, EEC, OOE). We then expand the scope of the market to include all Annex B regions, i.e., OECD + FSU + EET. Finally, to illustrate full global trading, we broaden the market to include the potential supply from the non-Annex B regions. All the numerical results corresponding to different cases are displayed in the tables presented in Section 7.

3.1 A First Case Study: OECD Only

3.1.1 The No-Trading Case

The MACs for the four OECD regions are all presented on Figure 8. The diamonds on the MACs correspond to the quantity of abatement required to meet the Kyoto commitment for each region, on the horizontal axis, and, on the vertical axis, the no-trading, or autarkic, marginal cost for that region. The autarkic marginal cost of abatement for Japan ($584/ton) is much higher than the marginal costs of abatement for the EEC ($273), the OOE ($233), or the USA ($186). The areas under the curves represent the total costs of abatement for each region. The total cost for the OECD is $115 billion.

Figure 8. OECD Regions Meeting their Kyoto Commitment, No Trading. (Table A)

3.1.2 The Trading Case

Figure 9 depicts what happens when there is emissions trading. Regional marginal costs equalize in such a way that the total amount of carbon abated is the same as in the no-trading case (the arrows on the x-axis, which represent the changes in quantities of carbon abated when trade occurs, sum to zero). The resulting price is the market price of emissions permits ($240/ton). It is below the autarkic marginal costs for JPN and the EEC, but above those for the OOE and USA. Consequently, JPN and EEC are importers of permits equivalent to 86 Mton of higher-cost domestic abatement avoided, while the OOE and USA undertake additional abatement in this amount to export the permits. Every region achieves some gains through trading, and the total savings for the OECD are $13 billion. The areas representing the regional savings from trade are displayed as the hatched areas on the graph for JPN and USA. Japan imports the most, 65 Mton i.e. 45% of the reduction required by its Kyoto commitment, and benefits the most from emissions trading ($10 billion). The USA is the principal exporter (83 Mton) and it draws the second largest benefit from emissions trading in this market ($2 billion). The EEC imports and the OOE exports smaller amounts of emission reductions, respectively, and each benefits by less than $1 billion. These relationships point out an important feature of emissions trading: regions whose autarkic marginal cost is farther from the trading equilibrium will import (or export) more and benefit more than those regions whose autarkic marginal cost is closer to the trading equilibrium.

Figure 9. OECD Regions Meeting their Kyoto Commitment, No Trading/Trading. (Table B)

3.2 Trading with All Annex B Regions

3.2.1 No Trade / Trade within Annex B Regions

Here we conduct the same analysis as above, except that the FSU and EET are included. In the no-trading case, the marginal cost of meeting the Kyoto commitment for the EET is $116/ton and its total cost of abatement is $5 billion. As for FSU, the commitment made at Kyoto would not result in a constraint on its carbon emissions, according to our model and nearly all predictions, because its Kyoto commitment corresponds to an emission level higher than the one predicted for 2010 (see Table 1). Therefore, compliance with Kyoto would result in no cost whatsoever for the FSU. The cost of compliance for all of Annex B would be $120 billion, i.e. the $115 billion for OECD regions, + $5 billion for EET.

In the emissions trading case with the FSU and EET included, the equilibrium market price is much lower than in the OECD only case, $127/ton. The OECD regions are all importers of permits, since the market price is lower than autarkic marginal cost for all of these regions; and the EET and FSU are exporters. The FSU accounts for virtually all of the exports (98%). As shown in Figure 10, about a third of these consist of `hot air,' with a cost of zero; but the remaining exports are generated by abatement undertaken to earn additional export profits up to the point that marginal abatement cost equals the market price. It costs the FSU $10 billion to abate the 234 megatons (Mton), but the permits can be sold for $30 billion for a net gain of $20 billion. When added to the $14 billion earned for exporting 111 Mton of the unused Kyoto entitlement, the FSU's total gain from emissions trading is $34 billion.

Figure 10. Trade with FSU: The `Hot Air' Effect.

For the five Kyoto-constrained regions, the cost of meeting the Kyoto commitment is reduced by $32 billion, as illustrated in Figure 11.[8] The four OECD regions avoid more costly domestic abatement by importing permits, and the EET is able to reduce its costs by a small profit on its exported permits. The reductions in cost, that is, the gains from emissions trading for the five Kyoto-constrained regions, are distributed roughly in proportion to autarkic marginal cost. The two regions with the highest autarkic marginal costs, Japan and the EEC, benefit the most from emissions trading in this market. Japan imports 66% of its reduction requirement and reduces its cost by $19 billion. The EEC imports 35% of its reduction requirement and reduces its cost by $7 billion. These two regions account for about one-third of the total emission reduction requirement for the five Kyoto-constrained regions, and about five-sixths of the gains from emissions trading for these regions accrue to them. The other three regions are characterized by autarkic marginal costs much closer to the Annex B market price; consequently, they trade much less. The USA and OOE are importers for 19% and 25% of their respective requirements, and the EET abates emissions by 5% more than required in order to export permits. The gains for these regions, which account for two-thirds of the total reduction requirement, total $5 billion, about a sixth of the gains from trading for the Kyoto-constrained regions. From the standpoint of world resource use, the aggregate cost of meeting the Kyoto commitments is much lower with Annex B trade ($54 billion) than without ($120 billion). The total gains from emissions trading are $66 billion, split about evenly between the FSU ($34 billion) and the OECD + EET ($32 billion).

Figure 11. Annex B Meeting their Kyoto Commitment, No Trading/Trading. (Tables C & D)

3.2.2 How Much Difference Does the `Hot Air' Make?

Part of the gains from Annex B trading results from a controversial feature that has come to be called `hot air:' the difference between the FSU commitment at Kyoto and its predicted emissions level in 2010. Since no abatement is undertaken to produce these permits, their export relaxes the aggregate constraint faced by the five Kyoto-constrained regions by about 8%. As a result, many observers argue that such exports should not be permitted, although admittedly, were the FSU's economy to grow faster than predicted here, global emissions would rise equivalently. From this point of view, the FSU's commitment represents a permissible level of emissions, which if unused is available for banking or export, as would be the case for any other Annex B party.

It is possible, of course, to model Annex B trading without the `hot air,' i.e. without allowing the FSU to sell permits that do not correspond to actual emission reductions.[9] With less supply, the Annex B market clearing price is higher, $150, so that the OECD regions + EET abate 90 Mton more domestically, import correspondingly fewer permits, and pay more for those imports (Table E). At this higher price, the FSU also abates more (20 Mton) and it sells 90 Mton less, hence 254 Mton. It is interesting to note that the reduction in the gains from trade are shared about equally: $9 billion less for the FSU (-25%) and $7 billion less for the OECD + EET (-21%).

Nevertheless, the reduction in OECD compliance cost and the corresponding gains from emissions trading, $51 billion, are still substantial and much greater than if trading were restricted to OECD regions only. This result occurs because, so long as the FSU is not as severely constrained by a Kyoto commitment as its potential trading partners are, it remains a very cheap source of emission reductions.

3.3 Full Global Trading

3.3.1 Adding the Non-Annex B Regions

To illustrate full global trading, we rely on aggregate supply and demand curves for emissions permits, as explained earlier and now illustrated in Figure 12. These curves indicate the total quantities of permits that would be supplied or demanded at various price levels in a given market. In the figure, there is only one demand curve because the Kyoto-constrained regions are the same in both the Annex B and the global markets. This single demand curve intersects the horizontal axis at the quantity equal to the sum of the emission reductions required to meet the Kyoto commitments, 1.31 Gton. This is the `Kyoto cap' represented by a vertical dotted line on the figure; it is also the quantity of emission permits that would be demanded if the price were $0/ton. At this price, the aggregate supply is the quantity of permits available at no cost: the FSU's `hot air,' 111 Mton.

Figure 12. Aggregated Supply and Demand Curves in 2010 under Kytoo Constraints. Annex B Trading / World Trading. (Table F)

As the price increases, the demand for permits diminishes, as more and more domestic abatement is undertaken, and the supply of permits increases as more abatement is justified in the exporting regions. As long as the market price is less than $116, the lowest autarkic marginal cost for the Kyoto-constrained regions,[10] these regions are always on the demand side; and the unconstrained regions are on the supply side. When the price reaches the marginal cost for EET, $116, this region becomes an exporter, supply grows faster, and the demand decreases more slowly, resulting in a `kink' on all curves, which is almost indiscernible because of the EET's small economic size. Such a kink is, however, readily seen on both supply and demand curves when the price reaches $186, the autarkic marginal cost for USA. There will be similar kinks at $233 when OOE becomes a supplier and at $273 when the EEC does. At $584, the autarkic marginal cost for Japan meeting the commitment, the demand for permits will be zero.

The ample supply of permits from non-Annex B regions causes a marked shift in the supply curve and results in a market price that is much lower ($24/ton) than in the Annex B trading case. The total cost of reducing global CO₂ emissions to achieve the Kyoto goals is astonishingly low: $11 billion vs. $54 billion with Annex B trading or $120 billion with no emissions trading!

At this price, the Kyoto-constrained regions depend far more on imports than when trading was restricted to Annex B regions only. In the aggregate, 71% of OECD + EET commitments are met through importing emission reductions from non-constrained regions; and the largest importers (proportionately) are those regions facing the highest autarkic marginal cost: Japan, 92%; EEC, 76%; USA, 68%; OOE, 66% and EET, 56%. On the suppliers' side, three countries account for the bulk of exports: China (47%), the FSU (23%) and India (11%), hence 81% altogether. Whether because of relatively small size or high relative abatement costs, the remaining four non-Annex B regions are small suppliers of emission permits to the Annex B regions.

With full global trading, the gains from emissions trading are much greater for the Kyoto-constrained regions ($94 billion vs. $32 billion with Annex B trading). The non-Annex B regions gain $10 billion by exporting permits, but their gains are much less than those of the Kyoto-constrained regions. The FSU is the only party that is worse off by this widening of the market. At $24/ton, the FSU abates about half as much as before, (101 Mton), and the `hot air' is worth much less. As a result, the FSU's net gain ($4 billion) in the global market is much less than when it does not compete with the non-Annex B regions ($34 billion). The distribution of the gains from emissions trading in the global market illustrates again the feature of emissions trading we just noted: regions whose autarkic marginal cost is further from the equilibrium price benefit more than regions whose marginal cost is closer to that price: in this global trading case, the clearing price is much closer to the shadow price of the exporting regions when they are not involved ($0/ton) than it is to the autarkic marginal cost of any of the importers.

3.3.2 Hot Air and Leakage

One of the arguments surrounding the use of emissions trading has been that it would increase global emissions, unless the `hot air' from the FSU (or elsewhere) could be kept out of the system. This argument ignores an interesting feature of the general equilibrium solution of CGE models, to which we alluded earlier: leakage. When only a sub-set of the regions of the world are constrained and there is no emissions trading, emissions `leak' to unconstrained regions; however, with emissions trading, there is no leakage, since all regions face the same carbon price.

The compensating effects of leakage and hot air are shown in Figure 13. If there were no leakage and no hot air, the 1,312 Mton reduction of emissions required of the five Kyoto-constrained regions could be expected to reduce 2010 global emissions from 9,098 Mton to 7,786 Mton. In the no trading case, a total 62 Mton of leakage (10 Mton to the FSU and 52 Mton to the non-Annex B regions) offsets a portion of the Annex B emission reduction, so that global emissions are actually 7,848 Mton. When the FSU is included in the trading regime, there is no leakage to the FSU since the carbon price is the same as in the Kyoto-constrained regions, but there is still some leakage to the non-Annex B regions. This amount is less, 35 Mton, because the price attached to carbon, and thus the incentive to leak, is less for all the Kyoto-constrained regions.[11] Global emissions increase not by 111 Mton, the amount of hot air, but by 84 Mton (111 Mton less the reduction in leakage, 27 Mton). With full global trading, there is no leakage whatsoever, as all regions face the same carbon price, and the net increase in global emissions associated with emissions trading is only 48 Mton.

Figure 13. Actual Levels of Emissions in the Different Trading Cases: Effects of Leakage and the FSU `Hot Air.' (Table G)

The particular numbers obtained in this model simulation are not what should be stressed. The important point is that, when evaluating emissions trading, the effect of `hot air' on the global reduction of emissions cannot be considered in isolation from leakage. Emissions trading would allow `hot air' into the system to the extent any party's Kyoto commitment is not binding, but it also reduces leakage to countries with non-binding commitments or no commitment at all. The net balance depends upon the amount of leakage and hot air, and both are sensitive to the model's emission prediction for countries with non-binding Kyoto commitments and its specification of the trade sector. For instance, higher 2010 emissions for the FSU will reduce hot air without much effect on leakage, and more substitutability in trade will lead to more leakage. Other assumptions than those presented here could easily yield results that would indicate that emissions trading would lead to a net reduction of global emissions. In sum, the interaction of leakage and emissions trading calls for a more nuanced treatment of `hot air.'

3.4 Summary of the Three Competitive Trading Cases

Figures 14 and 15 summarize the three competitive cases we have studied: no trade; trade within Annex B; and world trade, with respect to both the quantity and cost aspects of meeting the Kyoto commitments.

In Figure 14, the five constrained Annex B regions are represented by bars extending to the right representing the combination of domestic abatement and imported permits that would be chosen by each of these regions to meet the Kyoto commitment. For the two trading cases, the darker portions indicate the amount of the commitment met by importing emissions permits, and the percentage of imports is indicated. The quantities imported are progressively larger as the scope of the market is expanded (from bottom to top for each region) to include more low cost sources of emission reduction. The exporting regions--FSU and non-Annex B, and EET in the Annex B trading case--have bars both to the right and to the left. The amount of emissions reduction they undertake is indicated to the right; and to the left, the amount of emissions permits they export.[12] Those amounts are equal, except that the FSU disposes of a quantity of permits it can sell without undertaking any reductions, namely, the `hot air,' represented by the cross-hatched segment of the bar. This `hot air' shows up on the right-hand side in the smaller quantities of reduction associated with the two trading cases for Annex B and the World.

Figure 14. The effects of Trading: Emissions Reductions, Trade Quantities, Hot Air.

Figure 15 compares the effects of the Kyoto commitment, across cases, in terms of costs, that is, the quantities of Fig. 14 multiplied by prices. While trading benefits every region to some extent, two points become quite clear from this graph. First, the Kyoto-constrained regions facing relatively higher marginal costs derive relatively greater benefit from emissions trading. In both trading cases, Japan and the EEC import more and benefit more than does the USA, because the latter faces lower marginal costs of meeting the Kyoto commitment than the other regions. Second, the FSU exports more and benefits more when it does not compete with the non-Annex B regions to satisfy the demand from the importing regions. Notably, it is the only region that fails to gain from the expansion of the market to embrace global trading, and its loss is striking.

Figure 15. The Effects of Trading: Regional Abatement Costs and Trade Flows.

4. DEPARTURES FROM PERFECT TRADING

All of the cases studied so far assume that potential participants in emissions trading are not impeded by restrictions on trading, that competitive conditions apply, and that trading is conducted efficiently with low or non-existent transactions cost. Such assumptions simplify the analysis and exposition of emissions trading, but they are not necessarily realistic. In this section, we use the aggregate demand and supply curves to evaluate the effects of departures from these simplifying assumptions.

4.1 The Effect of Quantitative Limits on Demand

The Kyoto Protocol itself contains provisions relating to `supplementarity' that suggest that a party's ability to rely on emissions trading for meeting its Kyoto commitment may be limited in some manner. This provision has been given further impetus by the call for a "concrete ceiling" by the EU environmental ministers. The imposition of a limit on imports would affect the gains from trade; and in this section, we illustrate the effects by assuming a limit of 33% on any Annex B party's ability to meet its emission reduction requirement through imported permits.[13]

In the case of Annex B trading without restrictions, Japan would optimally realize 66% of its Kyoto commitment through imports, well above the 33% limitation, and EEC 35%, slightly above the limit, while none of the other importing regions would be constrained. As a result, Japan would import commensurately fewer permits and have to abate more domestically, up to a marginal cost of $322/ton. However, this is not all that happens.

As illustrated in Figure 16, less demand shifts the aggregate demand curve downwards, so the market clearing price is slightly lower than it otherwise would be: $114/ton. As an interesting result, all the regions that are not affected by this limit import more in response to the cheaper price, and they reduce domestic abatement by a corresponding amount. The USA would thus increase permit imports from 19% to 23% of its emissions reduction requirement, OOE from 25% to 29%. Those regions are unambiguously better off because the supplementarity condition removes the potential demand by higher cost abaters from the emissions trading market. Japan accrues some benefit from the cheaper permit imports, but the savings are swamped by the higher costs for significantly more domestic abatement.[14] EEC imports also are affected by the limit, but it benefits slightly from the lower price for the permits it does import. Overall, on the importers' side, the aggregate savings is practically the same, (99% of that of the non constrained case), but the gains are redistributed, mostly from Japan that loses $4 billion of potential gains, to USA, EEC, OOE. The two exporters, the FSU and EET, are hurt as well. The FSU sells slightly fewer permits at a lower price, thus losing $4 billion of potential gains. EET's gains as an exporter disappear, as it becomes a small importer. Overall, the aggregate gains from emissions trading are only reduced from $66 billion to $61 billion.

Figure 16. Annex B / World Supply and Demand in 2010 under Kyoto Constraints. Demand from Each Importing Region Limited to 33% of Commitment. (Tables H & I)

The exact numbers and effects will vary of course depending on the supplementarity limit and on the reduction required of various parties to meet the Kyoto commitment. The essential feature is that while the global costs might be a little higher with the supplementarity constraint, such a restriction on imports affects countries very differently. As a result, there is a significant redistribution of gains within importing regions, from regions with relatively high abatement cost, who would otherwise depend more heavily on imports, to regions with relatively low abatement cost.

The same 33% limit on imported permits would have a much greater effect with full global trading. Now, all the importing regions are constrained by the limitation. The price of imports is much lower than in the unconstrained case, $6 vs. $24, but for the constrained regions, the cheaper imports do not make up for the higher domestic abatement cost required: all importing regions, except EET, are worse off. Thus, for the OECD + EET, the aggregate cost for meeting the Kyoto commitments rises from $26 billion to $43 billion. The exporting regions gain virtually nothing in this situation ($1.7 billion compared to the $14 billion possible gains in the unconstrained situation), because of the restricted demand and the very low market price.

4.2 Non-Competitive Behavior in Supply

It is premature to worry about non-competitive behavior in a market that is not yet created, but there are dominant suppliers in each of the markets we have reviewed and we have examined the gains from emissions trading only under the assumption that maximizes those gains: perfect competition. The FSU is a particularly dominant supplier in the Annex B market and we turn to that case first.

4.2.1 The FSU in the Annex B Market

As an unconstrained Annex B region with hot air, the FSU is the source of the significant gains associated with Annex B trading and the almost exclusive supplier of permits in this market. The FSU is no longer a single political entity, but for the sake of illustration we show what would be the effect if the constituent nations were to take advantage of their dominant position by colluding to limit supply in order to maximize their profit.[15] The effect is not great: the price of permits is raised slightly, to $142/ton vs. $127 in the competitive case (Table J). The reason is that, as the price rises, the importing regions abate more and import less. It makes sense for the FSU (or any monopolist) to restrict supply only so long as the increase in price more than compensates for the decrease in quantity exported. In this case, the elasticity of the aggregate demand curve is such that there is not much to gain for the FSU by restricting supply. As a result, the gains from emissions trading are only slightly less than in the competitive case ($64 billion). What is changed is the distribution of the gains from emissions trading. The FSU increases its gains by $2.4 billion, while the gains for the importing regions is diminished by $4.7 billion. The benefits from emissions trading for the importing regions are still significantly greater than when there is no trading.

4.2.2 A Non-Annex B Cartel?

In full global trading, there is no dominant supplier of permits; however, the Kyoto Protocol does specify that non-Annex B emission reductions are to be provided to Annex B parties through a Clean Development Mechanism (CDM). The role of the CDM is not yet established; however, part of the rationale for it appears to be ensuring that non-Annex B countries receive acceptable prices (however determined) for their permit exports.[16] And indeed, as shown earlier, the prices under full global trading would be very low, compared to other alternatives. Furthermore, at a price of $24 and a volume of trade of 935 Mton of emissions reductions, elasticity conditions are more favorable to collusive behavior than in the Annex B case. Nevertheless, assuming successful combination through the CDM or other means, the non-Annex B nations do not enjoy as dominant a position as the FSU in the Annex B market. As a group, the non-Annex B regions supply 77% of the permits in full global trading, whereas FSU supplies 98% in the Annex B market. Consequently, any attempt by the non-Annex B regions to restrict supply would have to take into account the response of the FSU. We study below two cases: FSU competing with the non-Annex B regions and FSU cooperating.

In the first case, only the non-Annex B regions are acting as a monopoly.[17] The Annex B regions are all price takers, OECD + EET as importers, and the FSU as an exporter. The market price is significantly increased (to $63), so that the importers abate more and import 279 Mton less (Table K). Their gains from global emissions trading are reduced from $94 billion to $59 billion. Non-Annex B regions more than double their gains (now $22 billion) despite the reduction in exports by 342 Mton. As a competitive supplier, the FSU benefits doubly, from the higher price and greater exports (+63 Mton). Its gains from trading more than triple, to $14 billion. Overall, the global cost of meeting the commitment is still very low, $20 billion, but the gains from trade have shifted somewhat more in favor of the exporting regions (38% vs. 13%).

When the FSU cooperates with the non-Annex B regions, the resulting price, $108/ton, is considerably higher (Table L). What happens in the first case is here enhanced: the gains from emissions trading to the importing regions are reduced another $24 billion, to $34 billion, while those to the suppliers are increased, by $4 billion for the FSU and by $8 billion for the non-Annex B regions. Both the non-Annex B regions and the FSU cut back exports drastically compared to the fully competitive case, -24% for FSU, to 161 Mton, and -61% for non-Annex B regions, to 285 Mton. [18] The overall gains from trade are reduced to $82 billion, which is still considerable, and shifted even more in favor of the exporters (58% of the total gains). This case, the best possible one for the suppliers, provides the theoretical limit of the suppliers' gains from trading emissions permits in a world market: $47 billion.

These two cases illustrate that, if it could be organized, there is ample room for non-competitive behavior in the global emissions trading market, in contrast to the Annex B market. Such behavior leads to significant redistribution of the gains from importing regions to exporting regions, whether the FSU competes or cooperates with the non-Annex B regions. Furthermore, the gains to importing regions from emissions trading would still be very large, and greater than would be the case if trading were restricted to the Annex B regions only. For the FSU however, the gains would remain always lower than in the Annex B trading case.

4.3 Transactions Cost and Other Inefficiencies in Supply

A far more likely outcome in the global market, or the Annex B market for that matter, is that supply would be limited by transaction costs or a more general failure to take advantage of the economic opportunities provided by emissions trading. For instance, concerns about `additionality' and the inherent difficulty of identifying a counterfactual baseline for joint implementation projects may impose high transaction costs and thereby limit the supply from non-Annex B regions.[19] Alternatively, potential suppliers may not pursue available export opportunities with the complete economic rationality assumed by EPPA. Such departures from the model's assumptions can be easily simulated by assuming that only a certain share of what is potentially available at any given price would be supplied. If such were the case, the aggregate supply curves would be shifted upward and the market clearing prices would be higher, as shown in Figures 17 and 18.

Figure 17 illustrates the effect of a 50% reduction in available supply from the FSU due to such imperfections, in the Annex B trading case, assuming unfettered demand.[20] The price is raised to $167/ton, compared to $127 when completely efficient supply is assumed. As a result, the role of EET as a supplier in increased (to 11% total), as well as its benefits. Importing countries whose autarkic marginal cost is low, such as the USA, almost do not resort to trade, hence their gains decrease, while emissions trading still conveys considerable benefits to the relatively high cost abaters, Japan and the EEC. The FSU exports fewer permits than otherwise (now 190 Mton compared to 345 Mton), but at a higher price, so it still benefits from this new export opportunity, although its gains are reduced, to $30 billion from $34 billion.[21] The gains from emissions trading are less for all parties, but at $51 billion in the aggregate, those gains are still important.

Figure 17. Annex B Permit Supply and Demand in 2010 under Kyoto Constraints. Inefficient Supply: Supply = 50% Total. (Table M)

Figure 18 depicts the market equilibrium when only 50% and 25% of the quantities available from the FSU and non-Annex B regions are available. As was the case with Annex B trading, the price increases with the reduced supply, from $24 to $52 and $94 respectively. As before, the gains from trade for the importers are less than otherwise, especially for the low cost abaters, but still appreciable. The interesting feature is what happens on the supply side. Unlike the case with Annex B trading with such imperfections, the gains to the supplying regions are enhanced. The increase in the price more than compensates for their limited ability to supply, and their gains are significantly increased (+85% and +137% respectively for non-Annex B regions, +30% and +35% respectively for FSU).[22]

Figure 18. World Permit Supply and Demand in 2010 under Kyoto Constraints. Inefficient Supply: Supply = 50% and 25% of Total. (Table O)

5. CONCLUSIONS

5.1 A Readily Available Technique for Analyzing Trading Issues

Emissions trading raises many issues concerning magnitude and distribution of the benefits from trade. The primary purpose of this paper has been to explain a readily available technique for analyzing and explaining these issues. Marginal abatement curves are often drawn illustratively, but for all their heuristic value, good empirical estimates of these curves are hard to find. The MACs used here are not empirically estimated, but they are derived from the complex economic models that are commonly used to predict emissions and to evaluate the costs of various policies. As such, they are a compromise: better than purely heuristic curves, but not as good as an empirically estimated relationship. They are in fact only as good as the underlying models, which, for all their faults, are still commonly relied upon to provide insight and estimates of costs and other effects. Analysts who lack such a model and who have a slight aptitude for algebra can take the parameter estimates provided in Table 3 and conduct their own analyses.

It can also be hoped that other modeling groups will make explicit the MACs that are generated by their models, so that policy analysts will have the benefit of knowing how alternative representations of the underlying economic reality will affect the magnitude and distribution of the gains from emissions trading.

5.2 Emission Permit Trading: Implications for Policy

The object of any analytic exercise is to gain insight into policy issues; and many arise from this exercise.

The most fundamental is almost trivial: any emissions trading, no matter how constrained or imperfect, is better than none at all. The effect of trading is always to require less resources to achieve the same environmental goal, and thereby to preserve resources for other useful social goals. There is no emissions trading scheme in which all participating parties do not derive at least some benefit.

Second, the potential for gains from trading is huge, because of the considerable differences in abatement costs across regions. This potential should certainly provide incentives to both Kyoto-constrained and unconstrained regions to support emissions trading.

Third, from the standpoint of husbanding the world's limited resources, the fewer the constraints on trading the better. Even though non-competitive behavior and other departures from perfect trading do not eliminate the gains from emissions trading, they do inevitably increase costs.

Fourth, the gains from emissions trading will not be evenly distributed. As a general rule, regions whose autarkic marginal cost of abatement is relatively far from the market price of permits for a given market will derive the greatest benefit from emissions trading.

Fifth, unlike all other regions, the FSU is adversely affected by opening the market to non-Annex B supply. The potential conflict of interest between the FSU and non-Annex B regions may influence future negotiations over accession to Annex B or expanding trading to non-Annex B nations.

Finally, limitations and imperfections not only reduce the overall gains from trading, they also redistribute the remaining gains, often in unsuspected ways. For instance, a quantitative limitation on imports reduces the gains from emissions trading for exporters and for countries whose imports are restricted; but it benefits importing countries that are not affected by the limitation. Also, transaction costs and other forms of inefficiency might be expected to reduce the gains from trading for suppliers; but when supply is ample and prices low, any increase of price increases export revenues and gains from trading, whether due to strategic behavior or plain inefficiency.

5.3 Suggestions for Future Research

Our analysis has been limited to CO₂, yet another important dimension of the flexibility accepted at Kyoto is inclusion of the enhancement of sinks and the reduction of other greenhouse gases in meeting Kyoto commitments. Thus, another dimension for further research is broadening of the potential market by the inclusion of sinks and other greenhouse gases. Given appropriate CO₂-equivalence, analogous marginal cost curves could be constructed for the enhancement of sinks and the reduction of other greenhouse gases, and any region's resort to CO₂ emission reduction, sink enhancement and other GHG emission reduction could be explored using these curves. While aggregate costs would undoubtedly be reduced, it is quite unlikely that the distribution of the gains from trading would be the same as when only carbon is included.

Little has been said about uncertainty, and the analysis presented here is based upon one view of the future, that represented by the reference run in EPPA version 2.6. Other futures are quite possible, and it is evident that the marginal costs faced by Annex B parties in 2010 depend as much upon such predictions of economic and emissions growth as they do upon the relative positions of the MACs or the commitments undertaken at Kyoto. Higher or lower emissions growth may not shift the MACs (as opposed to moving along them), but such variations in growth will certainly affect regional supply and demand for permits, and thus the market clearing prices and trade flows detailed above. An important further research direction is the extent to which the conclusions drawn from this single forecast would be modified by a richer treatment of uncertainty.

The relative position of the MACs constitutes the backbone of this analysis. The MACs generated from EPPA are robust with respect to emissions trading policies and to variations in emissions growth, but we doubt that this result would hold for variations in more fundamental assumptions such as technology and substitution elasticities. The relative positioning of the MACs in EPPA--e.g., Japan as the highest cost abater, EEC next then USA and OOE--seems plausible, but what makes costs in Japan twice as high as in the EEC? And what makes China such a low cost supplier of emission reductions? We have tried to make our conclusions general, and thus not overly dependent on the particular MACs generated by EPPA 2.6; but the practical interest of most policy-makers will remain the application of the general principles to specific countries and regions. This calls for a better appreciation of what underlying characteristics make certain countries relatively high or low cost sources of abatement.

6. ACKNOWLEDGMENTS

We are greatly indebted to many colleagues and associates for consistent encouragement and critical comment. Foremost among these are the faculty and research staff associated with MIT's Joint Program on the Science and Policy of Global Change, particularly the EPPA Working Group. Particular thanks are due to Henry Jacoby, Dick Eckaus, Loren Cox and David Reiner for their careful comments on earlier drafts of this paper and to Ian Sue Wing for invaluable help in running the model. The encouraging response of participants of the Royal Institute for International Affairs (RIIA)/MIT Global Change Forum, held at London in June, 1998, gave much direction to the paper; and we are grateful to Nathalie Kosciusko-Morizet, Jean-Charles Hourcade, Thierry Le Pesant and Ken Chomitz for their subsequent interest and helpful comment. Finally, this research would not have been possible without the funding made available to the Joint Program by a number of corporations in the U.S., Europe and Japan, by EPRI, and by agencies of the Norwegian and U.S. Governments.

All the prices in the following tables are in 1985$.
NAB = Non-Annex B regions

TABLE A: Kyoto OECD only no trading

	USA	JPN	EEC	OOE	OECD
Reductions / ref 2010 (Mton)	572	144	307	171	1194
Marginal Costs ($/ton)	$186	$584	$273	$233	\
Cost of Abatement ($billion)	37.62	34.37	30.29	12.81	115.09

TABLE B: Kyoto OECD only OECD trading

	USA	JPN	EEC	OOE	OECD
Reductions / ref 2010 (Mton)	655	79	287	174	1194
Market Price of Permits ($/ton)	$240	$240	$240	$240	$240
Cost of Abatement ($billion)	55.28	8.22	25.02	13.44	101.96
Permits exp(-)/imp(+) (Mton)	-83	65	21	-3	0
i.e % of commitment (import)	\	45%	7%	\	\
Flows exp(-)/imp(+) ($billion)	-19.95	15.66	4.94	-0.64	0.01
Total Cost ($billion)	35.33	23.88	29.96	12.80	101.97
Gains from trade ($billion)	2.30	10.49	0.33	0.01	13.12

TABLE C: Kyoto no trading

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	572	144	307	171	118	1312	0	1312
Marginal Costs ($/ton)	$186	$584	$273	$233	$116	\	\	\
Cost of Abatement ($billion)	37.62	34.37	30.29	12.81	4.67	119.76	0.00	119.76

TABLE D: Annex B trading

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	466	49	201	128	124	968	234	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	111
Market Price of Permits ($/ton)	$127	$127	$127	$127	$127	$127	$127	$127
Cost of Abatement ($billion)	21.16	2.82	9.51	5.16	5.36	44.01	9.95	53.96
Permits exp(-)/imp(+) (Mton)	106	95	106	43	-6	345	-345	0
i.e % of commitment (import)	19%	66%	35%	25%	\	26%	\	\
Flows exp(-)/imp(+) ($billion)	13.44	12.06	13.51	5.49	-0.73	43.77	-43.77	0.00
Total Cost ($billion)	34.60	14.88	23.02	10.64	4.64	87.78	-33.82	53.96
Gains from trade ($billion)	3.03	19.49	7.27	2.17	0.03	31.99	33.82	65.81

TABLE E: Annex B trading, No hot air

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	509	56	220	139	135	1058	254	1312
`Hot air' (Mton)	\	\	\	\	\	0	0	0
Market Price of Permits ($/ton)	$150	$150	$150	$150	$150	$150	$150	$150
Cost of Abatement ($billion)	27.10	3.73	12.21	6.60	6.86	56.51	12.73	69.23
Permits exp(-)/imp(+) (Mton)	63	88	87	33	-17	254	-254	0
i.e % of commitment (import)	11%	61%	28%	19%	\	19%	\	\
Flows exp(-)/imp(+) ($billion)	9.40	13.23	13.00	4.90	-2.48	38.05	-38.05	0.00
Total Cost ($billion)	36.50	16.96	25.21	11.50	4.38	94.55	-25.32	69.23
Gains from trade ($billion)	1.12	17.41	5.08	1.31	0.29	25.21	25.32	50.53

TABLE F: World trading

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	182	12	73	59	52	378	101	723	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	0	111
Market Price of Permits ($/ton)	$24	$24	$24	$24	$24	$24	$24	$24	$24
Cost of Abatement ($billion)	1.66	0.14	0.71	0.41	0.43	3.36	0.81	6.99	11.15
Permits exp(-)/imp(+) (Mton)	390	132	234	112	66	935	-211	-723	0
i.e % of commitment (import)	68%	92%	76%	66%	56%	71%	\	\	\
Flows exp(-)/imp(+) ($billion)	9.27	3.15	5.57	2.67	1.57	22.24	-5.03	-17.21	0.00
Total Cost ($billion)	10.94	3.29	6.29	3.09	2.01	25.60	-4.22	-10.22	11.15
Gains from trade ($billion)	26.69	31.08	24.00	9.73	2.66	94.16	4.22	10.22	108.61

CONTINUED--TABLE F: World trading

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	51	437	102	42	2	89
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$24	$24	$24	$24	$24	$24
Cost of Abatement ($billion)	0.54	4.22	0.95	0.44	0.03	0.81
Permits exp(-)/imp(+) (Mton)	-51	-437	-102	-42	-2	-89
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-1.21	-10.40	-2.44	-0.99	-0.06	-2.12
Total Cost ($billion)	-0.68	-6.17	-1.49	-0.55	-0.03	-1.31
Gains from trade ($billion)	0.68	6.17	1.49	0.55	0.03	1.31

TABLE G: Leakage

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Ref emissions 2010 (Mton)	1838	424	1064	472	395	4193	763	4142	9098
Emissions no trading (MT)	1267	280	757	301	277	2881	773	4194	7848
Reductions / ref 2010 (Mton)	572	144	307	171	118	1312	\	0	1312
Leakage / ref 2010 (Mton)	\	\	\	\	\	0	-10	-52	-62
Emissions Annex B trading (MT)	1353	379	863	341	274	3210	544	4177	7931
Reductions / ref 2010 (Mton)	485	46	200	131	121	983	219	0	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	111	221
Leakage / ref 2010 (Mton)	\	\	\	\	\	0	\	-35	-35
Permits exp(-)/imp(+) (Mton)	87	99	107	40	-3	330	-330	0	0
Emissions World trading (MT)	1637	414	997	414	351	3813	681	3402	7896
Reductions / ref 2010 (Mton)	201	11	66	58	44	380	82	740	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	0	111
Leakage / ref 2010 (Mton)	\	\	\	\	\	0	\	0	0
Permits exp(-)/imp(+) (Mton)	370	134	241	114	74	933	-193	-740	0

CONTINUED--TABLE G: Leakage

	EEX	CHN	IND	DAE	BRA	ROW
Ref emissions 2010 (Mton)	927	1792	486	308	97	532
Emissions no trading (MT)	940	1801	486	309	103	553
Reductions / ref 2010 (Mton)	\	\	\	\	\	\
Leakage / ref 2010 (Mton)	-13	-9	0	-1	-6	-22
Emissions Annex B trading (MT)	937	1797	486	309	101	547
Reductions / ref 2010 (Mton)	\	\	\	\	\	\
`Hot air' (Mton)	111	\	\	\	\	\
Leakage / ref 2010 (Mton)	-10	-5	-1	-1	-3	-15
Permits exp(-)/imp(+) (Mton)	\	\	\	\	\	\
Emissions World trading (MT)	877	1347	379	266	95	439
Reductions / ref 2010 (Mton)	50	445	107	43	3	93
`Hot air' (Mton)	\	\	\	\	\	\
Leakage / ref 2010 (Mton)	\	\	\	\	\	\
Permits exp(-)/imp(+) (Mton)	-50	-445	-107	-43	-3	-93

TABLE H: Annex B trading

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	439	97	206	122	117	980	222	1202
`Hot air' (Mton)	\	\	\	\	\	\	111	111
Market Price of Permits ($/ton)	$114	$114	$114	$114	$114	$114	$114	$114
Cost of Abatement ($billion)	17.95	13.13	10.16	4.38	4.55	50.17	8.45	58.62
Permits exp(-)/imp(+) (Mton)	132	48	101	50	1	332	-332	0
i.e % of commitment (import)	23%	33%	33%	29%	1%	25%	\	\
Flows exp(-)/imp(+) ($billion)	15.09	5.42	11.55	5.66	0.12	37.82	-37.82	0.00
Total Cost ($billion)	33.03	18.55	21.70	10.03	4.67	88.00	-29.38	58.62
Gains from trade ($billion)	4.59	15.82	8.58	2.78	0.00	31.77	29.38	61.15
[Delta] gain in % / no limit (Table D)	52%	-19%	18%	28%	-97%	-1%	-13%	-7%

TABLE I: World trading

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	383	97	206	115	79	879	49	273	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	0	111
Market Price of Permits ($/ton)	$6	$6	$6	$6	$6	$6	$6	$6	$6
Cost of Abatement ($billion)	12.28	13.13	10.16	3.64	1.45	40.67	0.10	0.70	41.47
Permits exp(-)/imp(+) (Mton)	189	48	101	57	39	433	-160	-273	0
i.e % of commitment (import)	33%	33%	33%	33%	33%	32%	\	\	\
Flows exp(-)/imp(+) ($billion)	1.10	0.28	0.59	0.33	0.23	2.52	-0.93	-1.59	0.00
Total Cost ($billion)	13.38	13.41	10.75	3.97	1.68	43.19	-0.83	-0.89	41.47
Gains from trade ($billion)	24.25	20.96	19.54	8.85	2.99	76.57	0.83	0.89	78.30
[Delta] gain in % / no limit (Table G)	-9%	-33%	-19%	-9%	12%	-19%	-80%	-91%	-28%

CONTINUED--TABLE I: World trading

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	16	165	41	13	1	37
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$6	$6	$6	$6	$6	$6
Cost of Abatement ($billion)	0.05	0.43	0.10	0.04	0.00	0.09
Permits exp(-)/imp(+) (Mton)	-16	-165	-41	-13	-1	-37
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-0.10	-0.96	-0.24	-0.08	0.00	-0.22
Total Cost ($billion)	-0.05	-0.53	-0.14	-0.04	0.00	-0.13
Gains from trade ($billion)	0.05	0.53	0.14	0.04	0.00	0.13
[Delta] gain in % / no limit (Table G)	-93%	-91%	-91%	-93%	-94%	-90%

TABLE J: Annex B trading, FSU monopoly

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	495	54	214	135	131	1028	173	1202
`Hot air' (Mton)	\	\	\	\	\	\	111	111
Market Price of Permits ($/ton)	$142	$142	$142	$142	$142	$142	$142	$142
Cost of Abatement ($billion)	25.04	3.41	11.28	6.10	6.34	52.17	4.06	56.23
Permits exp(-)/imp(+) (Mton)	77	91	93	36	-13	284	-284	0
i.e % of commitment (import)	13%	63%	30%	21%	\	22%	\	\
Flows exp(-)/imp(+) ($billion)	10.93	12.86	13.24	5.14	-1.85	40.32	-40.32	0.00
Total Cost ($billion)	35.97	16.27	24.52	11.24	4.50	92.50	-36.26	56.23
Gains from trade ($billion)	1.66	18.10	5.77	1.57	0.17	27.27	36.26	63.53

TABLE K: World trading, CDM monopoly

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	317	28	133	92	86	656	164	382	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	0	111
Market Price of Permits ($/ton)	$63	$63	$63	$63	$63	$63	$63	$63	$63
Cost of Abatement ($billion)	7.29	0.82	3.24	1.78	1.86	14.99	3.45	1.52	19.96
Permits exp(-)/imp(+) (Mton)	255	116	174	79	32	656	-275	-382	0
i.e % of commitment (import)	45%	81%	57%	46%	27%	55%	\	\	\
Flows exp(-)/imp(+) ($billion)	15.99	7.30	10.91	4.99	2.00	41.19	-17.24	-23.94	0.00
Total Cost ($billion)	23.28	8.12	14.14	6.77	3.86	56.17	-13.79	-22.43	19.96
Gains from trade ($billion)	14.34	26.25	16.15	6.05	-3.86	58.92	13.79	22.43	95.14

CONTINUED--TABLE K: World trading, CDM monopoly

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	24	230	56	20	1	50
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$63	$63	$63	$63	$63	$63
Cost of Abatement ($billion)	0.10	0.92	0.22	0.08	0.00	0.19
Permits exp(-)/imp(+) (Mton)	-24	-230	-56	-20	-1	-50
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-1.52	-14.46	-3.54	-1.23	-0.06	-3.13
Total Cost ($billion)	-1.42	-13.54	-3.33	-1.15	-0.06	-2.94
Gains from trade ($billion)	1.42	13.54	3.33	1.15	0.06	2.94

TABLE L: World trading, CDM+FSU monopoly

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	417	42	179	116	112	866	51	285	1202
`Hot air' (Mton)	\	\	\	\	\	0	111	0	111
Market Price of Permits ($/ton)	$108	$108	$108	$108	$108	$108	$108	$108	$108
Cost of Abatement ($billion)	15.58	1.99	6.99	3.80	3.96	32.31	0.11	0.77	33.20
Permits exp(-)/imp(+) (Mton)	154	102	128	55	7	446	-161	-285	0
i.e % of commitment (import)	27%	71%	42%	32%	6%	37%	\	\	\
Flows exp(-)/imp(+) ($billion)	16.69	11.06	13.89	5.95	0.70	48.29	-17.47	-30.82	0.00
Total Cost ($billion)	32.28	13.05	20.87	9.75	4.66	80.61	-17.36	-30.05	33.20
Gains from trade ($billion)	5.35	21.32	9.41	3.06	-4.66	34.49	17.36	30.05	81.90

CONTINUED--TABLE L: World trading, CDM+FSU monopoly

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	17	172	43	14	1	38
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$108	$108	$108	$108	$108	$108
Cost of Abatement ($billion)	0.05	0.47	0.11	0.04	0.00	0.10
Permits exp(-)/imp(+) (Mton)	-17	-172	-43	-14	-1	-38
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-1.86	-18.58	-4.66	-1.51	-0.08	-4.15
Total Cost ($billion)	-1.81	-18.11	-4.54	-1.47	-0.07	-4.05
Gains from trade ($billion)	1.81	18.11	4.54	1.47	0.07	4.05

TABLE M: Annex B trading, supply limited to 50% potential

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	World
Reductions / ref 2010 (Mton)	539	61	234	146	142	1123	134	1257
`Hot air' (Mton)	\	\	\	\	\	\	55	55
Market Price of Permits ($/ton)	$167	$167	$167	$167	$167	$167	$167	$167
Cost of Abatement ($billion)	31.96	4.49	14.42	7.78	8.09	66.74	1.89	68.63
Permits exp(-)/imp(+) (Mton)	32	84	73	25	-24	190	-190	0
i.e % of commitment (import)	6%	58%	24%	15%	\	14%	\	\
Flows exp(-)/imp(+) ($billion)	5.36	13.96	12.17	4.22	-4.06	31.65	-31.65	0.00
Total Cost ($billion)	37.32	18.44	26.59	12.01	4.03	98.39	-29.76	68.63
Gains from trade ($billion)	0.30	15.92	3.70	0.81	0.64	21.37	29.76	51.13
[Delta] gain in % / no limit (Table C)	-90%	-18%	-49%	-63%	1889%	-33%	-12%	-22%

TABLE N: World trading, supply limited to 50% potential

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	286	24	120	84	78	593	75	590	1257
`Hot air' (Mton)	\	\	\	\	\	0	55	0	55
Market Price of Permits ($/ton)	$52	$52	$52	$52	$52	$52	$52	$52	$52
Cost of Abatement ($billion)	5.53	0.59	2.45	1.36	1.42	11.34	1.32	11.98	24.63
Permits exp(-)/imp(+) (Mton)	285	120	188	87	40	720	-130	-590	0
i.e % of commitment (import)	50%	83%	61%	51%	34%	55%	\	\	\
Flows exp(-)/imp(+) ($billion)	14.94	6.29	9.82	4.55	2.08	37.67	-6.82	-30.86	0.00
Total Cost ($billion)	20.47	6.88	12.26	5.90	3.49	49.01	-5.50	-18.88	24.63
Gains from trade ($billion)	17.15	27.48	18.03	6.91	-3.49	66.08	5.50	18.88	90.46
[Delta] gain in % / no limit (Table C)	-36%	-12%	-25%	-29%	-231%	-30%	30%	85%	-17%

CONTINUED--TABLE N: World trading, supply limited to 50% potential

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	45	355	81	36	2	70
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$52	$52	$52	$52	$52	$52
Cost of Abatement ($billion)	0.98	7.20	1.59	0.80	0.06	1.35
Permits exp(-)/imp(+) (Mton)	-45	-355	-81	-36	-2	-70
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-2.33	-18.59	-4.25	-1.90	-0.12	-3.66
Total Cost ($billion)	-1.35	-11.39	-2.66	-1.10	-0.07	-2.31
Gains from trade ($billion)	1.35	11.39	2.66	1.10	0.07	2.31
[Delta] gain in % / no limit (Table C)	99%	85%	79%	100%	121%	77%

TABLE O: World trading, supply limited to 25% potential

	USA	JPN	EEC	OOE	EET	OECD+EET	FSU	NAB	World
Reductions / ref 2010 (Mton)	395	39	169	111	106	819	50	415	1285
`Hot air' (Mton)	\	\	\	\	\	0	28	0	28
Market Price of Permits ($/ton)	$94	$94	$94	$94	$94	$94	$94	$94	$94
Cost of Abatement ($billion)	13.37	1.67	5.98	3.26	3.40	27.68	1.58	14.67	43.92
Permits exp(-)/imp(+) (Mton)	177	105	138	60	12	493	-78	-415	0
i.e % of commitment (import)	31%	73%	45%	35%	10%	38%	\	\	\
Flows exp(-)/imp(+) ($billion)	16.55	9.88	12.97	5.66	1.14	46.21	-7.30	-38.91	0.00
Total Cost ($billion)	29.92	11.54	18.96	8.93	4.54	73.89	-5.72	-24.24	43.92
Gains from trade ($billion)	7.70	22.82	11.33	3.89	-4.54	41.21	5.72	24.24	71.17
[Delta] gain in % / no limit (Table C)	-71%	-27%	-53%	-60%	-270%	-56%	35%	137%	-34%

CONTINUED--TABLE O: World trading, supply limited to 25% potential

	EEX	CHN	IND	DAE	BRA	ROW
Reductions / ref 2010 (Mton)	33	250	56	27	2	48
`Hot air' (Mton)	\	\	\	\	\	\
Market Price of Permits ($/ton)	$94	$94	$94	$94	$94	$94
Cost of Abatement ($billion)	1.23	8.79	1.92	1.01	0.08	1.63
Permits exp(-)/imp(+) (Mton)	-33	-250	-56	-27	-2	-48
i.e % of commitment (import)	\	\	\	\	\	\
Flows exp(-)/imp(+) ($billion)	-3.05	-23.40	-5.27	-2.50	-0.17	-4.52
Total Cost ($billion)	-1.82	-14.60	-3.35	-1.49	-0.10	-2.89
Gains from trade ($billion)	1.82	14.60	3.35	1.49	0.10	2.89
[Delta] gain in % / no limit (Table C)	168%	137%	125%	170%	220%	121%