Potential gains from CO2 trading in the EU.

A new Green Paper from the European Commission on emissions trading foresees the setting up of a CO₂ trading system within the EU for the energy sector. Because any such international environmental agreement is self-enforcing, the participants must have an economic net gain from joining the proposed system. Our contribution is therefore to follow the Green Paper proposal and investigate whether member countries and the largest industrial boilers in the electricity sector actually will receive significant net gains from CO₂ trade in the European Union rather than undertaking domestic actions solely. We show, based on the PRIMES model, that a full CO₂ emission trading system between Annex B countries suggests overall cost savings of the order of 40% compared with a situation with no trading at all between member states. A tradable CO₂ permit scheme with comprehensive coverage of emissions within the EU could reduce the total abatement costs by 32% compared with a system with no trading. In comparison, a Community-wide system containing only the electricity and steam sector would reduce the total abatement costs by 13% only. Though a tradable CO₂ permit market for the power and steam sector can provide significant gains from trading, these gains can be almost four times higher than for a trade system that includes all sectors in the EU. Thus, the electricity and steam sector is a fit target group as starting point, but in the longer run the system must be organized in a way that provides opportunities for other sectors to ‘opt in’ over time. Copyright © 2003 John Wiley & Sons, Ltd and ERP Environment. [ABSTRACT FROM AUTHOR]