This paper considers the "Kyoto Protocol," a milestone in worldwide concerted efforts toward global warming abatement, from an economic viewpoint. The Kyoto Protocol set a target for reduction of collective GHG (greenhouse gas) emissions, which required industrialized countries to cut their GHG emissions so that their total emissions as of 20 10 would be "5.2% below 1990 levels a year on average in the period from 2008 to 2012." To that end, the Protocol also specified GHG emissions reduction targets to be met by individual countries (areas). According to economic theory, attainment of the collective target with maximum efficiency requires the individually specified reduction targets to be set at levels achievable by individual countries at equalized marginal reduction costs. However, gaps are inevitable between theory and actually specified targets. In terms of efficiency, it is desirable for individual countries to be able to trade such "gaps," or the differences between theoretically optimal reductions and the targets actually specified by the Kyoto Protocol, which were in fact simply a product of political compromise. The mechanism for adjustment of such gaps by allowing GHG emissions to be traded (tradable permits) is known as "emissions trading." The adjustment is made between two areas and/or between two periods (intertemporal). Regarding the former, or inter-area trading, many studies have been conducted that confirm its effectiveness in slashing the cost of reducing GHG emissions, whereas few systematic studies have been made on the latter. Accordingly, in an attempt to verify the effects of intertemporal trading, this study first elucidated the theoretical grounds for its effectiveness by using a two-country two-period trading model (Fig. 1). Then, simulations were made by constructing an LP model (Fig. 2) extended from the aforementioned theoretical model (a ten-area six-period trading model provided with not only inter-area but also with intertemporal trading functions, which was an improvement on the "World Energy Industry Model" having an inter-area emissions trading function only). With the commitment periods punctuated every five years at 2015, 2020, 2025 and 203 0, as an extension to the 20 10 proposed under the Kyoto Protocol, two scenarios were prepared for running the model. One is the "Business As Usual" scenario, in which the Kyoto targets remain unchanged even from 2010 onward. The other is the "Tougher Environmental Constraint" scenario, which assumes that the Kyoto targets for stabilizing CO2 concentrations will become tougher in the later commitment periods. A total of 36 cases were simulated by varying the conditions (parameters) that could affect banking and borrowing in each scenario. The simulation results showed that the effect of intertemporal trading in trimming the GHG reduction cost would amount to 3 - 20% in the BUA scenario, and to 5 - 7% in the TEC scenario, thus confirming the effectiveness of intertemporal trading characterized by temporal flexibility.
