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Industry-Level Emission Trading in the EU

projected demands of fossil fuels and the implicit carbon emissions to which our model has
been calibrated under BaU.

3 Policy Scenarios and Numerical Results

3.1 Policy Scenarios

In our numerical simulations we distinguish four scenarios. We start with a scenario NTR
in which all Annex-B countries meet their Kyoto targets through domestic action only: The
governments set domestic emission taxes sufficiently high to meet the national reduction
targets.² The NTR simulation delivers a benchmark for the magnitude and distribution of
efficiency gains emerging from cross-country flexibility of emission abatement within the
EU. The natural counterpart to the NTR case is the scenario TRD, in which emission
permits can be traded across all sectors and EU member states: Equalization of marginal
abatement costs across all emission sources implies a cost-efficient solution with respect to
the overall EU reduction target, if we abstract from transaction costs and the possibility of
extra-EU emission trading. We can then measure to what extent the EU forgoes potential

² Likewise, the government could auction emission permits within domestic borders,
aligning the total amount of auctioned permits with its domestic Kyoto emission
reduction target.

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