Principal Research Results

Availability of CO2 Emissions and Electricity Trading Markets and Their Impacts on CO2Abatement Costs: Based on Market Trading Experiments among Virtual Utility Firms
BackgroundCO2 emissions trade is one of the flexible mechanisms in the Kyoto Protocol, and the European Union decided to introduce
emissions trading as of January 2004 imposing emission permits to large companies who produce electric power, steel, paper and pulp
and so forth. In Japan, Ministry of Environment is strengthening global warming measures and emission trading is one of the policyalternatives. Since power sector is responsible for more than 30% of Japan’s CO2 emissions, it is important to clarify effects, defects
and merits of emissions trading to power sector in advance.

Objectives
To verify the meanings of accessibility to emissions and electricity trades, we will execute economic experiments that describe various circumstances power companies face. In some experiments, access to both CO2 emission and electricity trades is possible, other cases only access to one market is possible, and extreme case access to both markets is impossible. To do such conditional
experiments, we will quantitatively present the cost effectiveness of availability of trading markets for power companies under themanagerial constraints such as power supply obligation, attainment of emission reduction target, cash flow constraint on investment ofpower plants, and power transmission capacity constraints, and so on.

Principal Results
The results of our trading experiments are summarized as follows: (1) The total supply cost of ten virtual power companies
is minimized under the condition that access to both CO2 emission and electricity trades is possible. The cost then increases when access to CO2 emission market is limited, and then when electricity market is restricted respectively. The cost is highest when access toboth markets is prohibited. (2) CO2 emission reduction target of the electricity industry is easily achieved by utilizing market trade either of electricity or emission allowance. When both markets are available the target is more easily achieved. (3) Since two markets
are complementary to each other, the prices of electricity and allowance are stabilized.
Thus market trades are generally considered to achieve greater efficiency in a sense of total supply costs, however it is not
generally observed that the gain from trade increases at every virtual firm level. Through our experiments, averagely, more than 90
percent of firms gain from trades when CO2 emission allowances are tradable in addition to electricity trade. The fact that some firms
cannot enjoy gains from trades may be due to the fact that players are unskilled in dealing trades, they have to face bounded rationality
and more fundamentally they cannot collect all information of markets and other players’ actions.
Main Researcher: Toru Ohkawara, Ph.D.,
Senior Economist, Socio-economic Research Center
ReferenceM.Wakabayashi, H. Fujii, Toru Ohkawara and Ken-ichi Tokoro, Availability of Trading Markets and Their Impacts on CO2Abatement Costs: Based on Market Trading Experiments among Virtual Utility Firms, CRIEPI Report Y03009,2004.
T. Ohkawara and M.Wakabayashi “Utility’s Challenges to Global Warming: Some Experimental Evidences from Trading Simulationsof CO2 Emission Permits & Electricity Among Virtual Japanese Utilities,” Preceding in the 19th World Energy Congress, 2004.
T. Ohkawara, M.Wakabayashi, and C. Matsuya, “Market Trading Experiments of CO2 Emission Permits and Electric Power Among
Virtual Japanese Utilities,” CRIEPI Report Y02004, 2002

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C. Harmonization of energy and environment

Fig.1 Behavior of Utility Firm

Fig.2 System of Trading Markets
Virtual companies trade both electricity and CO2emission permit

Table1 Cost Reduction Effects Based on Market Availability
Unit: 100 Million Yen

MeanMax
Min
Std. VerNo trade16,103
67,1222,810
20,359

Electricity
16,012
69,444
2,032
20,924Emission
15,22764,478
1,461
18,942

Both15,155
65,26499519,664

Cost in this table refers to average supply costs of 10 virtual companies. Since
the total supply costs differ in every experiment, thus we show descriptivestatistics.

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