The fundamentals of the future international emissions trading system

The study aims to analyze the sectoral marginal abatements cost curves for a number of EU countries as well as to examine the efficiency aspects and the economic impacts for the major sectors of the ETS under different carbon market configurations in 2010 and 2020. To produce a consistent and realistic assessment, we employ sources such as GHG National Inventories, NAPs and POLES world energy model to constitute the sectoral base year and 2010, 2020 emission levels in different countries and regions. We then use the market analysis tool ASPEN, which enables to derive supply and demand from sectoral MACCs produced with the POLES model, and to evaluate the economic impacts on the carbon market participants. The paper shows that, in compliance with the Kyoto targets, the benefits of an enlarged carbon market are significant, since more than 50% of the abatement in the short term have to be achieved in ETS sectors, which may indeed use CDM or JI credits. A second major conclusion is that in 2020 the new flexibility margins provided by the adjustment of investments in new capacities compensate for the increase in pressure towards stronger emission reductions. This reduces the relative importance of the enlarged carbon market.