Carbon Market In Brazil: analysing efiiciency and distributional effects

Abstract

Since the Kyoto Protocol several experiences with carbon markets have taken place elsewhere to enhance the cost-effectiveness of climate policies. In these markets emission rights can then be traded among regulated sources to achieve their goals. In the absence of asymmetric transaction costs, the criteria of emission rights does not affect the efficiency of the market but, on the other hand, they generates different distribution of costs and revenues. The aim of this study was to measure the efficiency and equity effects of two different criteria for allocation of emission rights based on a simulation model of a carbon market for the Brazilian industrial sector for the period 2010-2030 with a scenario in which the aggregate target is allocated by industry in proportion to the current sectoral emissions and another where sectoral target protects sectors with higher average mitigation costs. Results showed a reduction of 78-82% in total abatement cost in relation to accomplishing the same target with no market mechanism. In distributive terms the protectionist scenario showed that the metallurgy had its sectoral target raised to reduce the average costs of the others, in particular, the refining sector where abatement costs are much higher. In sum, the simulation exercises confirm the great efficiency of market instruments and emphasizes the political importance of the setting process of emission right allocation.