9.1 Policy Options

Climate policies can be implemented in different ways in WITCH: Based on the non-cooperative solution, a market for permits can be introduced with permit trading across regions. Optionally, banking and borrowing can be allowed for.

Alternatively, a carbon tax schedule can be implemented, which is recycled as regional lump-sum transfers as evident from the global budget constraint in the chapter on the Economy. The tax can be chosen as too target a given climate variable of MAGICC based on the model variables.

Subsidies of Investments in Research and Development, or portfolio standards or minimum renewable shares are additional policy options that can be implemented in the model.

Finally, in a coalition setting with one or more coalitions, the Cost-Benefit mode will implement an endogenous policy based on climate damage feedbacks and other externalities that are (partly) internalized by the coalitions.

9.1.1 Carbon market clearing

In the case of a global carbon permit market, the sum of regional net import of carbon permits \((Q_{nip})\) has to be equal to zero.

\[ \sum_n Q_{nip}(n,t) = 0 \]

The CO2 emission costs are then equal to the carbon permit price times the amount of net import of carbon permits.

\[ C_{CO2}(n,t) = p_{nip}(n,t) \times Q_{nip}(n,t) \]

9.1.2 Bank and borrowing

When banking and borrowing of permits is allowed, the (stock of) permit savings \(M_{SAV}\) are computed as the sum of existing savings plus net emission savings \(Q_{SAV}\):

\[ M_{SAV}(t+1,n) = M_{SAV}(t,n) + \Delta_t \times Q_{SAV}(t,n) \]

To avoid speculation of regions by buying more permits than needed, emission savings can be bounded by net import of carbon permits:

\[ Q_{SAV}(t,n) \le bigM \times \left( |Q_{nip}(t,n)| - Q_{nip}(t,n) \right), \]

where \(bigM\) is a very high level of maximum trade of emissions.