Emerald 2: Decision support for emission cap and trade Cap

The Emerald 2 framework generates marginal abatement cost curves, which give a set of options (and the associated costs) available to a firm to reduce emissions. The curve is a valuable tool for prioritising investments in emission reduction opportunities.

To arrive at emission abatement cost curves, the platform captures the technology and cost details of the production process, taking into consideration:

• technology (installed capacities, technical efficiencies, fuel type consumed)
• cost (fixed and variable)
• options and substitutes (which include retrofits, maintenance for improved efficiency of equipment, fuel switches, and technology changes.)

Optimisation techniques then evaluate the technology and cost implications for achieving desired production levels within the defined emission constraints and generate the cost curves.

Given that firms also have the option to buy emission allowances, it is essential to determine quantity of emissions to be reduced in-house versus number of allowances to buy. The quantum is determined by comparing the internal marginal cost of reduction to the emission allowance price.

The majority of the one billion allowances to be auctioned in 2013 would be bought by power generation utilities. The EU ETS will hold auctions at least weekly for EU allowances. This provides opportunity for plants to bid and buy allowances over time.