Allowance Allocation Methods Research Articles

Analysis and Optimization Suggestions on Allowance Allocation Methods of the Power Industry in the Carbon Market

The initial allocation of carbon emission allowances is an important component of the carbon market. An equitable, scientific, and operational quota allocation method and quota management system are the cornerstones for ensuring the healthy operation of the carbon market. Owing to the high emissions, simple process, and good data foundation, the pilot and national carbon market in China have initially included the power industry in allowance management and introduced a common and differentiated quota allocation method. In this study, we compared the allowance allocation methods for the power industry and summarized the methods for key issues such as unit classification, correction factor, product measurement, and quota carry-over. We observed that there were concerns, such as lagging issuance time, lack of carry-over provisions, lack of regulatory mechanisms, and imperfect methods, in the first performance cycle of the national carbon market quota allocation. We improved the allowance allocation system for the power industry in the carbon market from the methodological and management perspectives, including establishing a total allowance constraint, clarifying quota carry-over provisions, improving the quota verification method for co-firing units, optimizing correction factors' selection, and introducing a compensatory distribution system in a timely manner.

A Study on the Impact of Pilot Carbon Emission Trading Policies on Corporate Performance

This paper uses the carbon emission trading policy as a quasi-natural experiment to comprehensively investigate its impact on the financial and market performance of firms. The study uses data from A-share listed companies for the period from 2009 to 2022 and adopts the difference-in-differences model for a rigorous analysis. The mediating effect of financing constraints and the moderating role of managerial capabilities are examined with respect to the influencing mechanisms; heterogeneity was also analyzed in terms of carbon allowance allocation methods, carbon prices, environmental enforcement efforts, and type of industry. The results of the study show that the carbon trading policy has a significant effect on improving the financial performance of firms, while also inhibiting their market performance. The feasibility of the findings was further validated after conducting robustness tests such as propensity score matching and placebo tests. The mechanism analysis finds that financing constraints play a masking effect on the impact of carbon trading policies on firms’ financial performance; managerial competence can positively moderate firms’ market performance. Heterogeneity analysis shows that the inhibitory effect of emissions trading policies on market performance is more significant for firms in regions with a smaller share of free allowances. For companies in high carbon price regions, carbon trading policies have a more significant impact on financial performance. For companies located in regions with higher levels of environmental enforcement, the positive effect of carbon trading policies on financial performance is unchanged, but the dampening effect on market performance is more significant. Carbon trading policies have a stronger positive effect on the financial performance of high-polluting firms, but a more significant dampening effect on the market performance of low-polluting firms. The findings of this study enhance China’s research framework on the economic impacts of carbon trading policies on micro-enterprises, promoting sustainable business development and serving as a useful reference for policy sustainability.

Carbon allowance allocation based on comprehensive performance of carbon emissions: Case of typical industries in Zhengzhou.

Studying the comprehensive performance of industrial carbon emission has profound significance for improving carbon allowance allocation scheme and achieving the carbon neutrality target. The paper selects 181 enterprises in Zhengzhou as the case, a comprehensive carbon emission performance indicator system and a carbon allowance allocation model were established, and compared with other allocation schemes (historical/baseline method). The results showed that the overall differences in the comprehensive performance evaluation indicator of carbon emissions in typical industries in Zhengzhou were obvious, and there was a correlation with the characteristics of industrial production activities. The overall emission reduction of Zhengzhou was 244.33×103t, and the emission reduction ratio was 7.94% by simulating carbon allowance allocation under the comprehensive performance. The carbon allowance allocation method based on the comprehensive performance has the strongest restraint on the "high emission, low performance" industry, which is more equitable and more conducive to carbon emission reduction. In the future, it will be recommended to give full play to the leading role of the government, implement industrial carbon allowance allocation based on the comprehensive performance evaluation of carbon emissions, to achieve multi-objectives of resource conservation, environmental pollution abatement, and carbon reduction.

Carbon allowance approach for capital-constrained supply chain under carbon emission allowance repurchase strategy

PurposeThe purpose of this study is to investigate which of the two carbon allowance allocation methods (CAAMs), i.e. grandfathered system carbon allowance allocation (GCAA) and baseline system carbon allowance allocation (BCAA), is more beneficial to capital-constrained supply chains under the carbon emission allowance repurchase strategy (CEARS).Design/methodology/approachAdopting CEARS to ease the capital-constrained supply chains, this study develops two-period game models with manufacturers as leaders and retailers as followers from the perspective of profit and social welfare maximization under two CAAMs (GCAA and BCAA), where the first period produces normal products, and the second period produces low-carbon products.FindingsFirst, higher carbon-saving can better use CEARS and achieve a higher supply chain profit under the two CAAMs. However, the higher the end-of-period carbon price is, the lower the social welfare is. Second, when carbon-saving is small, GCAA achieves both economic and environmental benefits; BCAA reduces carbon emissions at the expense of economic benefit. Third, the supply chain members gain higher profits and social welfare under GCAA, so the government and supply chain members are more inclined to choose GCAA.Originality/valueBy analyzing the profits and total carbon emissions of capital-constrained supply chains under GCAA and BCAA, this study provides theoretical references for retailers and capital-constrained manufacturers. In addition, by comparing the difference in social welfare under GCAA and BCAA, it provides a basis for the government to choose a reasonable CAAM.

The first compliance cycle of China’s National Emissions Trading Scheme: insights and implications

China’s national Emissions Trading Scheme (ETS), the largest ETS in terms of the amount of CO2 regulated, was launched on the trading platform operated by the Shanghai Environment and Energy Exchange (SEEE) on July 16th 2021, and has successfully completed its first compliance cycle on December 30th, 2021. During the operation of its first cycle, China’s national ETS differs from other international ETSs in many aspects, including trading products and participants, allowance allocation method, compliance term, and offset mechanism, leading to certain unique trading patterns. Some unique settings are worth noticing including key emitters dominated by state-owned enterprises (SOEs) who also dominate transactions, large-scale power groups’ carbon strategies, allowances for 2 years of 2019 and 2020 being processed in one compliance period and allowed inter-year banking of allowances. All these have led to trading patterns characterized by cyclical demand-driven trading, insufficient trading capabilities of regulated entities, stable allowance price and an increased price of CCER. Nonetheless, the successful running of its first compliance cycle offers invaluable experience for future ETS development in operational mechanism improvement, sector coverage expansion, allocation optimization, and introduction of different types of market players and tradable products, and provides a good reference for future international expansion.

Does China emission trading scheme reduce marginal abatement cost? A perspective of allowance allocation alternatives

Emission trading schemes (ETSs) are regarded as cost-effective environmental regulatory policies; however, because of the loose carbon allowances, it is up for debate whether China's carbon emission trading scheme (CETS) plays a cost-effective role in carbon emission reduction. This paper investigates how the marginal abatement cost (MAC) is changed by the China CETS from a perspective of alternative allowance allocation methods. The empirical strategy adopts the directional distance function and difference-in-difference (DID) analysis, coupled with the industry-by-province level data from 2008 to 2016. The roles of free-auction combined allowance allocation rules and free allocation in the MAC are explored. Furthermore, the heterogeneous effects of adopted free allocation in CETS, i.e., benchmarking (BENCH), emission-based grandfathering (EGRAND), and intensity-based grandfathering (IGRAND) on MAC of industries are investigated. The empirical findings disclose the following. First, China CETS results in an 8% decline in MAC for the regulated industrial sectors in pilot areas. Second, regulated industrial sectors allocated carbon allowances by free rule decrease their MAC by approximately 1%, while those allocated carbon allowances by free-auction combined rule increase their MAC by 11%. Meanwhile, of the free allocation alternatives, IGRAND causes a 24% increase in the MAC, while EGRAND and BENCH allocation methods lead to insignificant changes in the MAC for the regulated industrial sectors.

Spillover effects and nonlinear correlations between carbon emissions and stock markets: An empirical analysis of China's carbon-intensive industries

This study analyzes the correlations between carbon emissions and related industry stock markets in China. We propose a carbon-intensive industry index firstly. According to the Spillover Index, the two markets interact and the carbon-intensive stock market acts as an information receiver in most cases. We apply the Multifractal Cross-Correlation Analysis, Detrended Cross-Correlation Coefficient, and the modified Time-lagged Detrended Cross-Correlation to characterize the nonlinear correlations between carbon allowance price returns and the stock returns of carbon-intensive industries. The carbon emission trading market is found to be more volatile and inefficient than the stock market; the properties of the carbon trading pilot explain the direction and magnitude of the nonlinear correlations. The level of intervention by the government authority affects the magnitude of correlations; the strongest dynamic return spillovers and the most persistent time-lag cross-correlations were observed in the Shenzhen pilot—the most market-oriented carbon emission trading pilot in China. The allowance allocation method plays an important role in deciding the direction of the nonlinear correlations. Our empirical results show the stock returns of carbon-intensive industries and the carbon allowance price returns were positively cross-correlated in Shenzhen and Shanghai pilots, while the cross-correlations were negative in Beijing, Guangdong, and Hubei pilots.

The environmental and economic effects of the carbon emissions trading scheme in China: The role of alternative allowance allocation

This paper examines the impact of China's carbon emission trading scheme (ETS) on carbon emissions reduction and economic performance with a focus on the role of alternative allowance allocation. Using the industry-by-province panel data during the 2008-2016 period, the empirical strategy employs a difference-in-difference-in-difference model. Some novel findings emerge. First, the ETS leads to a reduction in carbon emissions and emission intensity, in particular, for those adopting the benchmarking allowance allocation. Second, the reduction in carbon emissions arises from an increase in energy efficiency. Moreover, the adjustment of energy structure is more favorable to ETS regions adopting the benchmarking allocation rule compared with ETS regions using the grandfathering one. Third, the ETS has muted impacts on employment and returns on assets. A further comparison between the benchmarking and grandfathering rules reveals that the former is associated with a rise in employment, while the latter leads to an increase in returns on assets. In line with the findings, it is recommended that the government should further develop the benchmarking value of the sub-sectors, and gradually transform the allowance allocation methods into the benchmarking-dominated method for China ETS.

Influence of a pilot carbon trading policy on enterprises’ low-carbon innovation in China

ABSTRACT China’s pilot carbon trading policy is expected to be both efficient and flexible in reducing carbon emissions through incentivising low-carbon innovation. This paper analyses the effects of this pilot policy on low-carbon innovation using a difference-in-difference model, based on a sample of selected enterprises and carrying out a series of robustness tests to corroborate the results. The analysis shows that the pilot carbon trading policy is predicted to have a significantly positive effect on the low-carbon innovation of enterprises that fall under its scope, notably by alleviating obstacles to the financing of low-carbon innovation. Furthermore, a heterogeneity analysis of enterprises’ characteristics and carbon allowance allocation methods in different pilots indicates that the effect of the pilot carbon trading policy on enterprises’ low-carbon innovation will be reflected mainly in enterprises in China’s eastern provinces, and in state-owned enterprises. Compared with the grandfathering and historical intensity allocation methods, the findings of this study suggest that the extent of low-carbon innovation is significantly greater when the benchmarking method is used. The results of this paper offer some key insights into improving the policy design of a nationwide carbon trading market in China, as well as a reference point for other countries and regions, especially developing countries, in establishing a carbon trading market. Key policy insights China’s pilot carbon trading policy can promote low-carbon innovation. Easing the financing constraints of enterprises can promote low-carbon innovation. Compared with the grandfathering and historical intensity allocation methods, using the benchmarking method significantly improves the enterprises’ low-carbon innovation.

The impact of a carbon trading pilot policy on the low-carbon international competitiveness of industry in China: An empirical analysis based on a DDD model

This paper examines the impact of a carbon trading pilot policy on the low-carbon international competitiveness of an industry to test whether creating a carbon market causes the Porter effect. Using a sample of 33 industries in 30 provinces in China from 2009 to 2016 with a difference-in-difference-in-difference model (DDD) and a series of robustness tests, we find evidence of a significant positive influence of a carbon trading pilot policy on the low-carbon international competitiveness of industries covered by the pilot programs. Research on its influencing mechanism reveals that a carbon trading pilot policy promotes the low-carbon international competitiveness of industries by driving low-carbon technological progress. Furthermore, a heterogeneity analysis of industry characteristics and carbon allowance allocation methods in different pilots indicates that the impact of a carbon trading pilot policy on industry low-carbon international competitiveness is reflected mainly in industries with low-carbon emissions, high state-owned capital, and high export intensity. Compared with the grandfather method and the historical intensity method, the low-carbon international competitiveness of an industry is significantly increased when the benchmarking method is used. The results of this paper offer important insights for improving the policy design of a nationwide carbon market, as well as a reference point for other countries and regions, especially developing countries, in establishing a carbon trading market.

THE EFFECTIVE BENCHMARK SELECTION MODEL AND SIMULATION IN THE POWER SECTOR OF CHINA’S ETS

In 2019, the National Carbon Emission Trading Scheme (ETS) of China’s power generation industry was officially launched, and the free allocation and benchmark are the primary ways for allowance allocation in the first phase of the national ETS. The carbon allowance allocation method is the basis for the effective operation of the ETS. In order to evaluate China’s carbon allowance allocation method published by policy, we constructed a selection model of the effective benchmark and combined with three different scenarios such as no generation-right trading market, incomplete generation-right trading market and complete generation-right trading market to simulate the operation of the national ETS in China’s power generation industry. The study shows that: (1) according to the current benchmark value published by policy, the carbon allowance supply will exceed demand in all scenarios. (2) Regardless of the scenario, in order to balance the supply and demand of allowance in the ETS, the effective benchmark value should be adjusted to 35th–50th quantile of the carbon emissions per unit power generation.

An allowance allocation method based on dynamic approximation via online inspection data for deformation control of structural parts

Deformation resulting from residual stress has been a significant issue in machining. As allowance allocation can directly impact the residual stress on part deformation, it is essential for deformation control. However, it is difficult to adjust allowance allocation by traditional simulation methods based on residual stress, as the residual stress cannot be accurately measured or predicted, and many unexpected factors during machining process cannot be simulated accurately. Different from traditional methods, this paper proposes an allowance allocation method based on dynamic approximation via online inspection data for deformation control of structural parts. An Autoregressive Integrated Moving Average (ARIMA) model for dynamic allowance allocation is established so as to approach the minimum deformation, which is based on the in-process deformation inspection data during the alternative machining process of upside and downside. The effectiveness of the method is verified both by simulation cases and real machining experiments of aircraft structural parts, and the results show that part deformation can be significantly reduced.

Key challenges for China's carbon emissions trading program

AbstractChina's national carbon emissions trading program is expected to become the world's largest carbon market and is critical for achieving China's domestic mitigation goals. But China's trading program is likely to face significant challenges, due to its large scale and high complexity. First, the accuracy and credibility of China's emissions data have been widely criticized. There are significant inconsistencies between the national and provincial emissions inventories, and the facility‐level data are even less satisfying. Institutional capacities related to the carbon market need to be significantly enhanced to strengthen monitoring, reporting, and verifying capabilities. Second, compared to emissions trading programs in other parts of the world, China's program is likely to face greater market volatility, due to the country's economic structural transition from a manufacturing‐based to a service‐based economy. Wise cap‐setting and allowance allocation methods and proper price containment mechanisms are needed to maintain market stability. And third, China is a market economy with many features of a central planning system, particularly in the energy sector. Large state‐owned enterprises (SOEs) do not act as profit‐maximizing entities, and their behaviors could undermine the efficiency of the cap‐and‐trade program. To address these challenges, we provide a series of policy recommendations, including capacity building from central to local levels, wise selection of allowance allocation methods to cope with changing economic realities, and deepening market‐oriented reforms in energy sectors and SOEs.This article is categorized under: The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior

A non-uniform allowance allocation method based on interim state stiffness of machining features for NC programming of structural parts

For thin-walled parts, uniform allowance to each machining surface is allocated by the traditional machining method. Considering the sequence of the adjacent machining features, it may cause poor stiffness for some side walls due to a minor wall thickness, which may cause the deformation of the final formed parts to be large, or deduce machining efficiency for some machining features due to too thick remains. In order to address this issue, a non-uniform allowance allocation method based on interim state stiffness of machining features for the finishing of thin-walled structural parts is proposed in this paper. In this method, the interim state model of machining features is constructed according to the machining sequence of the parts, and the stiffness of the side wall is taken as the evaluation index to allocate reasonable allowance value to the corresponding machining surface to ensure the stiffness requirement of the parts in the machining process. According to the finite element simulation results, the non-uniform allowance allocation method proposed in this paper can effectively improve the stiffness of the parts and reduce the deformation of the parts, when compared with the traditional uniform allowance machining method.

New Carbon Emissions Allowance Allocation Method Based on Equilibrium Strategy for Carbon Emission Mitigation in the Coal-Fired Power Industry

The carbon emissions from coal-fired power have become an increasing concern to governments around the world. In this paper, a carbon emissions allowances allocation based on the equilibrium strategy is proposed to mitigate coal-fired power generation carbon emissions, in which the authority is the lead decision maker and the coal-fired power plants are the follower decision makers, and an interactive solution approach is designed to achieve equilibrium. A real-world case study is then given to demonstrate the practicality and efficiency of this methodology. Sensitivity analyses under different constraint violation risk levels are also conducted to give authorities some insights into equilibrium strategies for different stakeholders and to identify the necessary tradeoffs between economic development and carbon emissions mitigation. It was found that the proposed method was able to mitigate coal-fired power generation carbon emissions significantly and encourage coal-fired power plants to improve their emissions performance.

The influence of different allowance allocation methods on China's economic and sectoral development

ABSTRACTChina launched its national carbon emissions trading scheme (ETS) in 2017. The choice of allowance allocation methods can strongly influence the political acceptance of an ETS by enterprises/sectors that are covered by it. This article builds a computable general equilibrium model to conduct a quantitative analysis of the effects of nine common allowance allocation methods on both the macro-economy and the industries covered by the ETS. The results of the model show that national gross domestic product (GDP) decreases by 0.37–0.44% during the 13th Five-Year Plan period against a backdrop of a 2% annual reduction in carbon emissions from the sectors covered by the ETS compared with the business-as-usual scenario. China's total emissions drop by 1.71–1.76%. When auctioning and allocation approaches without ex-post adjustment are used, the allowance price is 40–45 yuan/tCO2. When the dynamic allocation methods are used, the allowance price increases to 70–75 yuan/tCO2. Auctioning and allocation approaches without ex-post adjustment exert the same influence on macroscopic indicators (such as GDP and total emissions) and industry indicators (such as output and price). The dynamic allocation methods have a subsidy effect, which can significantly reduce the effect of the ETS on GDP and industry output while significantly increasing the allowance price and decreasing the economic efficiency of the ETS. The cement and steel industries are the most sensitive to the output subsidy effect of the dynamic allocation methods. This article suggests a limit on the use of dynamic allocation approaches to avoid excessively high allowance prices and excessive subsidies for overcapacity industries.Key policy insightsAuctioning and one-off allocation purely based on historical data are most economically efficient; dynamic allocation based on updated or actual output data could reduce the impact of the ETS on enterprises’ output, but will increase the allowance price and thus reduce the economic efficiency of the ETS.Implementing a national ETS will have limited impact on China's GDP, but could promote emissions abatement of the whole economy in an efficient way.Different allocation methods have almost the same impact on GDP, but the impacts on different sectors are significantly different.

Effectiveness of pilot carbon emissions trading systems in China

ABSTRACTChina is in the process of establishing a national emissions trading system (ETS). Evaluating the implementation effectiveness of the seven pilot ETSs in China is critical for designing this national system. This study administered a questionnaire survey to assess the behaviour of enterprises covered by the seven ETS pilots from the perspective of: the strictness of compliance measures; rules for monitoring, reporting and verification (MRV); the mitigation pressure felt by enterprises; and actual mitigation and trading activities. The results show that the pilot MRV and compliance rules have not yet been fully implemented. The main factors involved are the lack of compulsory force of the regulations and the lack of policy awareness within the affected enterprises. Most enterprises have a shortage of free allowances and thus believe that the ETSs have increased their production costs. Most enterprises have already established mitigation targets. Some of the covered enterprises are aware of their own internal emission reduction costs and most of these have used this as an important reference in trading. Many enterprises have accounted for carbon prices in their long-term investment. The proportion of enterprises that have participated in trading is fairly high; however, reluctance to sell is quite pervasive in the market, and enterprises are mostly motivated to trade simply in order to achieve compliance. Few enterprises are willing to manage their allowances in a market-oriented manner. Different free allowance allocation methods directly affect the pathways enterprises take to control emissions.Key policy insightsIn the national ETS, the compulsory force of ETS provisions should be strengthened.A reasonable level of free allowance shortage should be ensured to promote emission reduction by enterprises.Sufficient information should be provided to guide enterprises in their allowance management to activate the market.To promote the implementation of mitigation technologies by enterprises, actual output-based allocation methods should be used.The government should use market adjustment mechanisms, such as a price floor and ceiling, to ensure that carbon prices are reasonable and stable, so as to guide long-term low carbon investment.

Aggregated impact of allowance allocation and power dispatching on emission reduction

Climate change has become one of the most important issues for the sustainable development of social well-being. China has made great efforts in reducing CO2 emissions and promoting clean energy. Pilot Emission Trading Systems (ETSs) have been launched in two provinces and five cities in China, and a national level ETS will be implemented in the third quarter of 2017, with preparations for China’s national ETS now well under way. In the meantime, a new round of China’s electric power system reform has entered the implementation stage. Policy variables from both electricity and emission markets will impose potential risks on the operation of generation companies (GenCos). Under this situation, by selecting key variables in each domain, this paper analyzes the combined effects of different allowance allocation methods and power dispatching models on power system emission. Key parameters are set based on a provincial power system in China, and the case studies are conducted based on dynamic simulation platform for macro-energy systems (DSMES) software developed by the authors. The selected power dispatching models include planned dispatch, energy saving power generation dispatch and economic dispatch. The selected initial allowance allocation methods in the emission market include the grandfathering method based on historical emissions and the benchmarking method based on actual output. Based on the simulation results and discussions, several policy implications are highlighted to help to design an effective emission market in China.

Comparison of Carbon Emission Trading Schemes in the European Union and China

Given the growing evidence and scientific consensus on global climate change, carbon emission trading schemes (ETS) have been deemed crucial in mitigating the problem. Therefore, this study compares the mechanisms of ETS in the European Union with those in China. The results indicate similarities in cap determination, the coverage and calculation method of allowance allocation, trading participants and allowance category, offset credit, and MRV. On the other hand, the allocation method and supervision of allowance allocation, allowance formats and trading methods, market risk management, market linkage mechanism, and legislation security evidently appear to vary. However, the results were unable to identify which ETS is absolutely good or bad due to the political, economic, and institutional contexts and the varying developmental phases. Eventually, drawing on these findings, we conclude with implications for the promotion of ETS.

The Korean emissions trading scheme: business perspectives on the early years of operations

ABSTRACTKorea’s domestic emissions trading scheme commenced in January 2015. It targeted mainly industrial and power sectors, and compelled companies to transform how they manage energy efficiency and mitigate GHGs. This study sets out to explore how Korean companies evaluated their allocation position and engaged in emissions trading in the first compliance period, and to identify their views on trading barriers and policy expectations at the start of emissions trading. Questionnaire surveys and on-site interviews targeting Korean companies under the Korean emissions trading scheme were conducted at the start of operations (February to March 2015) and after the first compliance year (May 2016), respectively. Actual operation results are observed and compared with the survey findings. This study extrapolates implications for policy and presents suggestions for the government and the target companies in terms of how to improve the current emissions trading scheme in order to further stimulate emissions trading.POLICY RELEVANCEThis study attempts to bridge the gap between companies and government policy in operating the domestic emission trading scheme in Korea. Empirical results, based on analysis of company-level data, reveal how businesses perceive K-ETS and how this relates to the operating results, which saw only limited trading of surplus emissions taking place in the early phase. Key barriers to active trading identified in the study include supply–demand imbalance, policy uncertainty and lack of preparedness of companies over carbon pricing. These barriers could be addressed by improved transparency of allowance allocation methods, possibly restricting carry-over of surplus allowances, ending policy uncertainty and providing more information to companies that can support companies’ policy understanding of the carbon pricing based on the market mechanism. Targeted companies should proactively participate in emissions trading in the early phase, in order to learn from it and prepare for the future introduction of auctioning.