Greenhouse gas emission permit trading with different uncertainties in emission sources

The paper considers high and differentiated uncertainties associated with greenhouse gas inventories in the context of compliance evaluation in an emission trading program. One common approach adopted in the literature is to discount tradable permits for uncertainty. Following this general idea, we derive exact rules for markets using such permits-we call them effective permits. First, permit allocation to each market participant is adjusted based on the inventory uncertainty and the acceptable risk of noncompliance. Second, original emission permits are recalculated into effective permits, reflecting individual inventory uncertainty and the risk of noncompliance as well. We then illustrate emission adjustments and effective permits to two trading schemes. Since the derived market rules assume nonstochastic distribution of uncertainty, we also discuss the choice of the risk level, which accounts for stochastic uncertainty distribution.