UK Emissions Trading Scheme Seminar - Summary and Conclusions
The Environment Business UK emissions trading seminar was held on 12 September 2001 at the Institute of Civil Engineers. Twenty people attended from sixteen different companies.
There were three presentations in the morning, followed by an interactive bidding and trading simulation in the afternoon.
Bridget Rosewell - Chairman of The Environment Business - gave the first presentation on the rules of the UK Emissions Trading Scheme (ETS).
Joseph Swierzbinski - Senior Lecturer in Economics, UCL - talked about strategies for the Incentives Auction, including the following illustrative auction examples:
  • Standard descending clock auction - where there is no after-market for permits, a dominant strategy is to bid your true valuation
  • Divide the Dollar game - when there is a fixed sum of money available to divide up, the amount you bid depends upon your competitors bids
  • Auction with a large competitive after-market for permits - your strategy depends completely on your forecast of the market price
  • Winners Curse - often in auctions, bidders do not take all the available information into account and end up bidding too much.

The fact that a tonne of CO2 in the auction is effectively worth three times the price of an allowance in trading was discussed.
Laurence Smith - The Environment Business - presented current knowledge about abatement costs, how to model the UK ETS and the results of The Environment Business' UK Emissions Trading Model.
In the afternoon, the attendees were divided up into five companies, each with an emissions baseline and a list of abatement cost opportunities. After allowing time to analyse this information, a mock incentives auction took place where companies made bids in emissions reductions. From this, companies derived emissions targets for the following years. Companies decided which abatement technologies to implement and traded permits and future permits in the following years to try to maximise their profits whilst meeting their targets.
Conclusions from the simulation were:
  • the rules for the auction and trading do work
    Companies bid into the auction. One of them reduced their bid late on, thinking of the "Divide the Dollar" game above, which meant that not all the government's money was spent but targets for emissions reduction were set.
  • companies tended to be very conservative in the emissions reductions bid into the auction
    Some companies bid little above those projects which already had a positive net value. This led to the subsequent market price being very low and some companies had permits they wanted to sell but were unable to find buyers.
  • emissions trading did significantly reduce the overall cost of making emissions reductions
    Once trading started, all companies adjusted their strategies to take account of the allowance price and participated in trading. This led to lower costs of compliance than expected when companies made their bids.
  • every company profited from being in the scheme
  • but companies could have made more money with different strategies
    By bidding more emissions in to the auction, companies could have gained greater revenues from the scheme.
For more information please contact Bridget Rosewell or Laurence Smith on 020 8392 0643.