The Alberta Carbon Market: an Exploration of Alternative Policy Options Through Agent-Based Modeling
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THE ALBERTA CARBON MARKET: AN EXPLORATION OF ALTERNATIVE POLICY OPTIONS THROUGH AGENT-BASED MODELING OLUFEMI AIYEGBUSI BSc (Honours) Economics, Obafemi Awolowo University Ile-ife, 2005 A Thesis Submitted to the School of Graduate Studies of the University of Lethbridge in Partial Fulfillment of the Requirements for the Degree MASTER OF SCIENCE IN MANAGEMENT Faculty of Management University of Lethbridge LETHBRIDGE, ALBERTA, CANADA © Olufemi Aiyegbusi, 2012 Dedication To: The arms that taught me to war The hearts that taught me to love The minds that taught me to dream - and the lips that taught me to keep moving To DMBMB iii Abstract Our study examines some design alternatives for a carbon market by exploring the fledgling Alberta carbon market. We attempt to evaluate the performance of these designs on the bases of trade volume, cost efficiency and stability. To achieve this we construct an empirically- calibrated but simple agent-based model, certain aspects of which we selectively modify to incorporate various design options. We make comparisons among these options based on data simulated from the ensuing family of models. We find strong evidence that in general, market design features such as source-of-credits, the scale of the market, and pricing-mechanism are very important considerations that influence the performance of the market. In addition, we find support for the notion that the level of the price cap relative to the average cost of abatement in the market matters, and beyond a threshold, higher price caps are associated with lower levels of performance. iv Acknowledgments I wish to acknowledge the contributions of several people who have added value to this thesis, from its inception over a year ago up to its completion. These include those who have inspired, motivated, guided, critiqued, proofed, examined or otherwise supported my efforts; without them this study would not have arrived at fruition. I also wish to recognize those who have been helpful to me in one way or the other through the course of this program. While I have compiled a brief list of such names, this list is far from exhaustive. Of central influence were the contributions made by my supervisor–Dr. Rossitsa Yalamova–who took active responsibility in guiding my efforts and allowed me first hand exposure to complexity science and sustainability studies; Dr. John Usher–my first reader–whose ideas and insightful comments continuously realigned me with the most fruitful paths of enquiry; and Dr. Oz Palasvirta –my second reader–who was mainly responsible for any claims to clarity that this thesis may have. I wish to thank all three of them (who constitute my committee) for their unflinching support and faith in me, as well as their early insistence on an ambitious exploration of little-charted territory. I also wish to acknowledge my external examiner–Dr. Vikas Mehrotra–who, despite his busy schedule, honored the invitation to examine this thesis and pored over about 150 pages in a bid to enhance its quality. I wish to express my sincere appreciation also to Dr. Helen Kelley and Mrs. Tammy Rogness– the MSc Management program director and administrator respectively–for their moral and administrative support throughout the duration of my study. Mrs. Rogness also went over and above her duties in facilitating most processes that would have been arduous and for this I am also grateful. I also wish to recognise the collegial support of members of my cohort with and from whom I have learnt in the past two years, as well as the efforts of Dr. Jurgen Groeneveld of Helmholtz-UFZ to whom I owe the foundations of my Netlogo fluency. Lastly, I appreciate the support given by my dear wife–Titilola–who kept me motivated through the lows and highs. v Table of Contents Dedication ……………………………………………………...................................................... iii Abstract …………………………………………………………………………………….......... iv Acknowledgments…...……………………………………………………………………………. v Table of Contents …………………………………………………………………………….….. vi Chapter 1: Introduction …………………………………………………………………………... 1 Chapter 2: Literature Review …………………………………………………………………….. 5 2.1 Background ……………………………………………………………………………… 5 2.1.1 Alternative Strategies For Combating Climate Change ...……………………… 7 2.1.2 Some Major Sustainability Debates And Issues ...…………………………….. 10 2.1.2.1 Emissions Reduction Versus Emissions Intensity Reduction…………………. 10 2.1.2.2 Emissions Taxes Versus Emissions Trading…………………………………... 13 2.1.2.3 Are We Really Serious About Mitigation?–Evidence From Montreal To Cancun …………………………………………………………………………………. 16 2.2 Carbon Markets- A Global Survey …………………………………………………….. 25 2.2.1 The EU ETS ………………………………………………………………...…. 25 2.2.2 The Australian Carbon Market ……………………………………………...… 28 2.2.2.1 New South Wales (NSW) Greenhouse Gas Reduction Scheme (GGAS) …...... 31 2.2.3 American Carbon Schemes …………………………………………………… 33 2.2.3.1 Regional Greenhouse Gas Initiative (RGGI) …..……………………………… 34 2.2.3.2 Western Climate Initiative (Wci) And North America 2050 Initiative ……….. 36 2.3 Canada’s Federal And Provincial Responses To Climate Change–Political And Economic Developments …………………………………………………………….............................. 39 2.3.1 The Federal Picture …...……………………………………………………….. 40 2.3.2 Brief Survey Of Some Canadian Provinces …………………………………… 44 2.3.2.1 British Columbia (BC) ……………………………………………………..….. 45 2.3.2.2 Ontario ………………………………………………………………………… 48 2.3.2.3 Saskatchewan ……………………………………………………………….…. 49 2.3.2.4 Manitoba……………………………………………………………………….. 51 2.3.2.5 Quebec……………………………………………………………………. …… 52 2.4 The Alberta Carbon Market- Salient Features .………………………………………… 56 Chapter 3: Research Questions …………………………………………………………………. 66 3.1 Research Question 1 ...................................................................................................... 66 3.2 Research Question 2 …………………………………………………………………… 66 3.3 Research Question 3 …………………………………………………………………… 67 3.4 Research Question 4 …………………………………………………………………… 67 Chapter 4: Methodology………………………………………………………………………… 69 4.1 Agent-Based Modeling- A Brief Explication .…………………………………………. 70 4.2 Research Design .……………………………………………………………………….. 85 4.2.1 The Basic Model ………………………………………………………………. 85 4.2.2 Experiments ………………………………………………………………….. 101 4.2.2.1 Experiment I …………………………………………………………………. 102 4.2.2.2 Experiment II ………………………………………………………………… 103 4.2.2.3 Experiment III ………………………………………………………............... 104 4.2.2.4 Experiment IV ………………………………………………………………... 105 4.2.3 Experimental Procedure And Data Extraction ……………………………….. 105 4.2.4 Calibration And Validation ………………………………………………….. 107 Chapter 5: Simulation Results ………………………………………………………………… 111 5.1 Preliminary Observations .........………………………………………………………. 112 5.2 Experimental Results …………………………………………………………………. 115 vi 5.3 Discussion .……………………………………………………………………………. 115 Chapter 6: Conclusion …………………………………………………………………………. 121 References ……………………………………………………………………………………... 125 Appendix A ……………………………………………………………………………………. 139 Appendix B ……………………………………………………………………………………. 140 Appendix C ……………………………………………………………………………………. 148 vii Chapter 1: Introduction Over the past decade and half, putting a price on carbon emissions has emerged as the single most promising component of any combination of strategies for mitigating climate change. Its rationale is straightforward: if there is a reasonable cost attached to polluting, then there is an incentive to avoid emitting more than is necessary and sustainable. However, what price to put on carbon emissions (in essence, what this ‘reasonable cost’ should be) and how to arrive at this price such that it is effective enough to align production and consumption patterns with environmental goals remain much debated issues. While some policy-makers and researchers such as Stiglitz (2010) and Mankiw (2009) favor a carbon tax mostly for its simplicity and direct effect on price; others support mitigation through a cap-and-trade framework due to its advantages with respect to the certainty it affords in meeting emissions-reduction targets, its efficiency in cost allocation (as observed by Yang & Oppenheimer, 2007) and tolerability in a tax-averse world; while others yet (for example Hepburn, 2006) advocate a combination of these two tools. In combination with other policies, market-based cap-and-trade systems have been successfully used before (for instance to reduce Sulphur-Dioxide emissions (NAPAP Report, 2005)), and so have become appealing to policy-makers as a dominant and electorate-favored tool which could effectively mitigate global warming, and efficiently allocate costs while encouraging sustainable growth and development. By internalizing the environmental cost of business–a negative externality–into corporations’ cost functions for example, cap and trade programs have the potency of birthing a cost structure that makes firms responsible for the effect of their activities on the environment, without necessarily stifling economic growth. This thesis explores design issues and dynamics in the Alberta cap-and-trade system within a Complex Adaptive System (CAS) framework. We choose to examine the Alberta carbon market for three major reasons. First, according to Environment Canada (2012), Alberta– home to about 10% of Canadian population– emits a huge percentage (about 33%) of the total national 1 inventory of carbon-dioxide, and is expected to witness massive growth in emissions due to its expanding oil exploration and power consumption. This makes it an interesting market to study, and a