Carbon emission trading and carbon taxes under uncertainties

Byline: Tatiana Ermolieva (1), Yuri Ermoliev (1), Gunther Fischer (1), Matthias Jonas (1), Marek Makowski (1), Fabian Wagner (1) Abstract: The idea of market-based carbon emission trading and carbon taxes is gaining in popularity as a global climate change policy instrument. However, these mechanisms might not necessarily have a positive outcome unless their value reflects socioeconomic and environmental impacts and regulations. Moreover, the fact that they have various inherent exogenous and endogenous uncertainties raises serious concerns about their ability to reduce emissions in a cost-effective way. This paper aims to introduce a simple stochastic model that allows the robustness of economic mechanisms for emission reduction under multiple natural and human-related uncertainties to be analyzed. Unlike standard equilibrium state analysis, the model shows that the explicit introduction of uncertainties regarding emissions, abatement costs, and equilibrium states makes it almost impossible for existing market-based trading and carbon taxes to be environmentally safe and cost-effective. Here we propose a computerized multi-agent trading model. This can be viewed as a prototype to simulate an emission trading market that is regulated in a decentralized way. We argue that a market of this type is better equipped to deal with long-term emission reductions, their direct regulation, irreversibility, and 'lock-in' equilibria. Author Affiliation: (1) International Institute for Applied Systems Analysis, Schlossplatz 1, 2361, Laxenburg, Austria Article History: Registration Date: 22/06/2010 Received Date: 05/01/2009 Accepted Date: 15/06/2010 Online Date: 16/07/2010