Carbon emissions markets: a simulation approach
Since the advent of the Kyoto Protocol in 1997, increasing international attention has focused on the implications of anthropogenic climate change. In particular, consequences for the economy have dominated national debates in several industrialised countries. If the Protocol is ratified, industrialised nations will face a binding limit on their carbon dioxide equivalent (CO2-e),emissions of six greenhouse gases. National emissions quotas require countries to develop domestic emissions regulation, which, to a large extent, consist of emissions permit trading schemes. The Virtual Emissions Trading Program (VETP) is a simulation model that uses financial models to simulate a market for carbon emissions permits in which participants take on roles as emitters, sequesters, traders, and a regulator. Participants are required to meet emissions targets through investment and trading, with the object of maximising the value of their business within a given policy framework. A number of policy parameters can be manipulated to simulate various scenarios on the domestic rules which may govern a carbon constrained future. The model has implications for (i) greenhouse gas emission policy analysis; (ii) corporate strategy development for operations within a carbon constrained future; (iii) education in the economics of market mechanisms used in constraining carbon emissions; and (iv) generation of experimental data for academic research. This paper elaborates on the VETP model and its relationship to the complex and evolving policy environment surrounding a carbon constrained future. Preliminary results from a simulation conducted with industry participants are reviewed.
Keywords: Climate change, Emissions trading, Kyoto Protocol, Market mechanisms, Environment, Experimental economics, Simulation