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This paper sets out a theoretical model to analyse the effect of UK’s climate change levy (CCL) and the emissions trading scheme (ETS) on the productivity and overall economic efficiency of businesses. A microeconomic analysis at plant level enables us to understand the implications of compliance cost for the overall cost structure of the plant. Some of the dynamics of an economic instrument can be lost at an aggregate level. We will use a stochastic translog frontier cost function with a cost inefficiency component to analyse whether the two instruments affect the overall economic efficiency of the firm. The model allows for factor substitution to take into account changes in relative factor prices, which can reduce the perceived adverse effects of the two instruments on productivity and efficiency of plants. The paper also briefly outlines the implications for the cost function due to some of the key developments since their inception in 2001 (CCL) and 2002 (ETS).

An enduring issue in environmental regulation is whether to clean up existing “old” plants or in some manner to bring in new “clean” plants to replace the old. In this paper, a unit-level data base of emissions by nearly 2000 electric generating units from 1985 through 2002 is used to analyze the contribution of these two factors in accomplishing the significant reduction of sulphur dioxide emissions from these sources in the United States. The effect on SO emissions of the new naturalgas-fired, combined-cycle capacity that has been introduced since 1998 is also examined. The results indicate that cleaning up the old plants has made by far the greatest contribution to reducing SO emissions, and that this contribution has been especially large since the introduction of the SO cap-and-trade program in 1995. The new natural-gas-fired, combined cycle units have displaced conventional generation that would have emitted about 800.000 tons of SO; however, the effect has not been to reduce total SO emissions since the 9.0 million ton cap is unchanged, but to reduce the quantity of abatement required of other units in meeting the cap and thereby the cost of doing so.

Emissions trading helps to bring about emission reductions in regions and business sectors where they are least costly. The cost level highly depends on the absolute level of emission reduction required and the capacity of economies to shift to a carbon-free mode of production. As a framework for understanding this transition and the policy-business interaction, a multi-region framework is used which integrates political decisions on global and regional emission targets, equity considerations, technical choice and the market dynamics of permits. Welfare maximization for each region, subject to production, investment, damage functions and emissions trading costs, results in regional permit threshold prices and a subsequent demand-supply adjustment to an average price. Based on this price, the optimal emission reductions for each region serve as target levels in reaction functions, leading to an iterative dynamic game and Nash equilibria of future emission permits allocation. The model is applied with stylized data for 11 world regions and four cases (business as usual, equal per capita, 10% reductions of baseline, stabilization).

The perception of the project-based mechanisms has varied since their inception under the name of Activities Implemented Jointly (AIJ) to their form under the Kyoto Protocol of Joint Implementation (JI) and the Clean Development Mechanism (CDM). AIJ projects of course still exist under the Marrakech Accords. The controversy surrounding the concept of emissions trading and the need for purely domestic reduction actions has not really abated. The role of JI and the CDM and of AIJ is therefore interesting in the way these mechanisms have alternately been propelled along by their role as market mechanisms in achieving a low carbon future ‘at least cost to society’ and then reined in by those concerned that the priority should be domestic action. New arguments have appeared with time. The environmental integrity of the reductions achieved by project based mechanisms is now seen as a key selling point in an international market beset by ‘hot air’. Thus the popularity of the project mechanisms is now being propelled along by concerns on environmental integrity but then limited by problems with increasing transaction costs due to the complexity of the system to ensure that integrity.

The pressure to reduce transaction costs for the project mechanisms has led to investigation of possible simplified and standardised procedures for baselines for the project mechanisms. This paper therefore traces the evolution of the project mechanisms and some of the latest developments in carbon accounting for reductions for large and small-scale projects as well as looking at the implications for projects under the EU and UK emissions trading schemes.

The Clean Development Mechanism is one of the flexible mechanisms in the Kyoto Protocol. In this paper the prevailing technology types and project locations of CDM projects are analyzed. The prevailing technology types are hydropower (24% of all projects), followed by bio- and landfill gas (16%). The distribution can be generally explained by the values for the Internal Rates of Return (IRRs), including the revenues from CERs (Certified Emission Reductions), of all of these technology types, except for hydropower. Besides the fact that landfill CDM projects generally have an attractive IRR, an additional advantage of this type is the fact that methane emissions are reduced, resulting in higher revenues from CERs.

The most popular CDM countries are Brazil, India, Costa Rica and Panama. One of the indicators for a high suitability of a country is a high country-specific Carbon Emission Factor. An analysis shows that more than 50% of all electricity CDM projects are located in a country whose CEF is among the 40% lowest. It can be concluded that other factors must play a more important role in those cases.

Also the sensitivity of the IRR has been tested in a case project by varying the CER price, the MWh price for electricity, and the total amount of waste used. All three parameters are approximately linearly related to the IRR. It can be concluded that all three determinants of the IRR that are analyzed have a significant influence.