EU ETS Research Articles

Does Speculation Matter in the Carbon Pricing Framework? Insights from the EU Emissions Trading System

To align with the global goal of keeping temperature below [Formula: see text]C, a market-based initiative, “Emissions Trading System” (ETS), has been developed to mitigate climate change. However, while the carbon allowances traded at the ETS are mostly held and traded by polluting companies, financial actors engage in “speculation”, activities that might be detrimental to the functioning of the ETS have also invested in the ETS. By drawing from the big data archive of Google Trends, we construct a news-based speculation index to proxy for the role of speculation in the dynamics of carbon pricing. Given our preliminary finding of inherent volatility and the mixed-frequency nature of the dataset, we employ the GARCH-MIDAS econometric technique to test the hypothesis that an all-inclusive framework that reflects the emission compliance and emissions non-compliance dynamics of the ETS is the most accurate approach to modeling carbon prices. We show that higher speculation in the ETS fosters higher long-term volatility in carbon prices, that speculation is a good predictor of carbon prices, and that its positive impact on carbon price returns makes the ETS an attractive investment opportunity. We provide a data-driven framework upon which the growing debate about whether the behavior of the non-compliance emission actors in the ETS endangers or benefits the functioning of the ETS can be evaluated empirically.

Does compensating firms for indirect carbon costs work? Evidence from Finnish manufacturing

The EU ETS indirect cost compensation subsidy was given out in the 2010s to compensate firms for increased electricity costs caused by the EU Emission Trading System, with the aim to support the competitiveness of producers in the EU. This paper studies the effects of the compensation subsidy on firm performance empirically with production plant level data from Finland. There is no clear evidence that the electricity costs have in fact been higher during the subsidy period, and the way that the subsidy was designed was not efficient. Perhaps for these reasons, the results find no indication of improved firm performance for the subsidy recipients.

Rewetting on agricultural peatlands can offer cost effective greenhouse gas reduction at the national level

To reach EU’s carbon neutrality target by 2050, emission reductions in the land-use sector are needed. Agricultural peatlands attribute for half of the greenhouse gas emissions of cropland in both in EU and Finland. High greenhouse gas emissions from agricultural peatlands are primarily caused by CO2 emissions following aerobic peat decomposition due to deep drainage, and studies have shown that raising water-table has potential to slow down the decomposition process. Here we studied the emission reduction potential and cost of implementing controlled drainage, paludiculture, peatland restoration and afforestation to current land use on agricultural peatlands in Finland. We created three scenarios with increasing amount of wet field use on cultivated organic soils and estimated their effects on national greenhouse gas emissions and farmers’ income. The yearly emission reduction ranged from 0.3 to 5.0 Mt CO2 equivalents in the different scenarios compared to the current state in Finland. Emission reductive land use had a negative impact on the farmers income, which should be compensated. Assuming the government compensates the lost income for the farmers, the cost of emission reduction ranged from −4 to 45 € per ton of CO2 equivalents. Rewetting provided the most emission reduction per area and was the most cost effective. We conclude that substantial emission reduction is attainable by rewetting agricultural peatlands. The cost of emission reduction is inexpensive compared to average carbon price in European Union emission trading system, or to the costs of technical carbon capture and storage in Finland.

The impact of abatement technology difference on optimal allowance trading scheme under the stability of international environmental agreement

The impact of abatement technology difference on optimal allowance trading scheme under the stability of international environmental agreement

The effect of carbon quota allocation methods on maritime supply chain emission reduction

In September 2020, the European Parliament decided to include the CO2 emitted on the all intra-European and 50% of extra-European voyages in the European Union Emission Trading System (EU-ETS) starting from 2022, in order to reduce the CO2 emission. With the implementation of EU-ETS, the maritime supply chain will inevitably be significantly affected. Different carbon quota allocations in ETS have different impact on the CO2 emission reduction, which motivates us to investigate the effect of different carbon quota allocations on maritime CO2 emission reduction. Therefore, this paper considers two carbon quota allocations: the historical total quantity method and the historical intensity method, and develops a game model for each method. Then, the equilibrium solutions of each game model are analyzed. With the help of the system dynamics and the software Vensim, numerical experiments are conducted to verify the properties obtained in the analysis of the equilibrium solutions. The experimental results indicate that 1) Green technology (GT) can effectively reduce carbon emissions. Based on long-term simulation results, the GT investments will be gradually offset by profiting from carbon quota trading. 2) Profits may vary with price, but the Historical Intensity method consistently achieves better carbon reduction effects or relatively higher profits. 3) The marginal profits of companies with similar historical intensity baselines are almost the same. This gives an advantage to companies who implement green technologies earlier, as they can quickly gain returns from GT.

The Effectiveness of the EU ETS Policy in Changing the Energy Mix in Selected European Countries

In the field of economic analysis, the study of the EU ETS policy has primarily focused on the impact of renewable energy consumption on economic growth, as well as the role of legal and fiscal instruments in the development of clean energy. This study aimed to evaluate the effectiveness of the EU ETS policy in altering the energy mix of selected European countries, providing both cognitive and applicational value. The evaluation of the effectiveness of this policy focused on the structure of the energy mix and the relationship between rising CO2 emission allowance prices and the decreasing share of coal in the energy mix. The goal was achieved through statistical analysis of secondary sources, primarily sourced from Bloomberg (2016–2024). The research findings indicated that changes in the structure of energy sources varied across the studied European countries, due to the adopted energy source utilization strategy, resource availability, and geopolitical situations. Additionally, different correlation values were noted between rising CO2 emission allowance prices and the expected reduction in fossil fuel use. Therefore, the EU ETS policy does not fulfill its assigned role—its implementation contributes to disparities in the economic situations of European economies and creates conditions for unequal competition.

Enhancing natural carbon sinks: Simulation of land use change under different carbon market scenarios by developing an ANN-ABM model

The carbon market mechanism presents an innovative approach to achieving carbon neutrality, however, its impact on regional carbon sink enhancement remains uncertain. This paper proposes an analysis framework based on an Artificial Neural Network-Agent-Based Model (ANN-ABM) to simulate the potential contribution of carbon market mechanism in enhancing carbon sinks. Taking the case of Chongming, China, the results demonstrate significant economic potential with forest land expansion from 2010 to 2020, equivalent to 30.69 % of eco-compensation. Under scenarios introducing a carbon market, there is an increased probability of converting land to high carbon sink types. Compared to the baseline scenario, carbon prices at 1.34 US$/t and 6.27 US$/t result in additional funds of 8.94 % and 41.46 %, respectively, and increase the carbon sink by 12.52 % and 30.28 %. The findings contribute to an understanding of how the value of carbon sinks can be realized through market mechanism and offer guidance for innovative eco-compensation approaches.

The impact of the European Union emissions trading system on carbon dioxide emissions: a matrix completion analysis

Despite the negative externalities on the environment and human health, today’s economies still produce excessive carbon dioxide emissions. As a result, governments are trying to shift production and consumption to more sustainable models that reduce the environmental impact of carbon dioxide emissions. The European Union, in particular, has implemented an innovative policy to reduce carbon dioxide emissions by creating a market for emission rights, the emissions trading system. The objective of this paper is to perform a counterfactual analysis to measure the impact of the emissions trading system on the reduction of carbon dioxide emissions. For this purpose, a recently-developed statistical machine learning method called matrix completion with fixed effects estimation is used and compared to traditional econometric techniques. We apply matrix completion with fixed effects estimation to the prediction of missing counterfactual entries of a carbon dioxide emissions matrix whose elements (indexed row-wise by country and column-wise by year) represent emissions without the emissions trading system for country-year pairs. The results obtained, confirmed by robust diagnostic tests, show a significant effect of the emissions trading system on the reduction of carbon dioxide emissions: the majority of European Union countries included in our analysis reduced their total carbon dioxide emissions (associated with selected industries) by about 15.4% during the emissions trading system treatment period 2005–2020, compared to the total carbon dioxide emissions (associated with the same industries) that would have been achieved in the absence of the emissions trading system policy. Finally, several managerial/practical implications of the study are discussed, together with its possible extensions.

Extreme spillovers across carbon and energy markets: A multiscale higher-order moment analysis

The complexity of carbon market mechanisms and the uncertainty in market conditions raise questions on how carbon and energy markets interact. The majority of existing studies focused on the lower-order moment spillover across carbon and energy markets, thereby posing limitations on carbon risk management and carbon market efficiency. This paper analyzes multiscale skewness and kurtosis spillovers across carbon and energy markets under different market conditions. It is found that carbon market is a short-term net skewness spillover receiver, but becomes a medium-term risk source under all market conditions, capable of transmitting skewness risk to the natural gas market. The carbon market acts as a short- and medium-term kurtosis risk source for the natural gas and electricity markets in the lower probability of extreme returns, but bears the kurtosis risk from the natural gas and coal markets when the extreme risk is high. These results indicate that policymakers should take measures to adjust carbon prices when facing long-term skewness risk and a lower probability of extreme returns in the carbon market, to prevent further spread of risk to the energy markets.

Emission trading in a high dimensional context: to what extent are carbon markets integrated with the broader system?

The EU ETS represents the cornerstone of the EU climate policy framework. While most of the studies focus on the determinants of carbon price, this work will provide further insights into the influence of European Emission Allowance (EUA) prices on carbon dioxide trends and variables of the economic-financial-climate-environmental system considering a large set of time series. Results highlighted how CO2 appears to be more influenced by commodity prices, climate variables, and past industrial performances. Furthermore, a shock in carbon prices could potentially exert significant turbulence on the carbon dioxide series, fading in intensity as time goes by. Overall, there appears to be a net positive effect on the influence of carbon prices on the system. However, robustness checks identified how the impact of carbon price on CO2 and other variables of the model is still weak. This work sheds light on the EU ETS's influence on a set of multidimensional variables. Still, overlapping national policies appear to interfere with the EU ETS effectiveness in the EU.

Carbon market risk estimation using quantum conditional generative adversarial network and amplitude estimation

AbstractAccurately and efficiently estimating the carbon market risk is paramount for ensuring financial stability, promoting environmental sustainability, and facilitating informed decision‐making. Although classical risk estimation methods are extensively utilized, the implicit pre‐assumptions regarding distribution are predominantly contained and challenging to balance accuracy and computational efficiency. A quantum computing‐based carbon market risk estimation framework is proposed to address this problem with the quantum conditional generative adversarial network‐quantum amplitude estimation (QCGAN‐QAE) algorithm. Specifically, quantum conditional generative adversarial network (QCGAN) is employed to simulate the future distribution of the generated return rate, whereas quantum amplitude estimation (QAE) is employed to measure the distribution. Moreover, the quantum circuit of the QCGAN improved by reordering the data interaction layer and data simulation layer is coupled with the introduction of the quantum fully connected layer. The binary search method is incorporated into the QAE to bolster the computational efficiency. The simulation results based on the European Union Emissions Trading System reveals that the proposed framework markedly enhances the efficiency and precision of Value‐at‐Risk and Conditional Value‐at‐Risk compared to original methods.

Analysis of hydrogen supply and demand in China's energy transition towards carbon neutrality

The role of hydrogen in the transition to carbon-neutral energy systems will be influenced by key factors such as carbon neutrality pathways, hydrogen production technology costs, and hydrogen transportation costs. Existing studies have not comprehensively analyzed and compared the impact of these key factors on the development of hydrogen supply and demand under China's carbon neutrality pathways. This study uses the Global Change Assessment Model (GCAM) with an upgraded hydrogen module to evaluate the development potential of China's hydrogen industry, considering various carbon neutrality pathways as well as hydrogen production and transportation costs. The findings indicate that, by 2050, hydrogen could account for 8%–14% of final energy, averting 1.0–1.7 Bt of carbon emissions annually at an average mitigation cost of 85–183 USD t−1CO2. The total hydrogen production is projected to reach 75–135 Mt, with 34%–56% from renewable energy electrolysis and about 15%–29% from fossil fuel-based CCS. On a sectoral level, by 2050, the hydrogen demand in the industrial and transportation sectors is expected to reach 37–63 Mt and 30–42 Mt, with a potential reduction of about 0.6–0.9 BtCO2 and 0.5–0.6 BtCO2. The share of hydrogen in the final energy of the steel and chemical sectors is estimated to be 9%–19% and 17%–25%, collectively accounting for 36%–42% of total hydrogen demand and 46%–50% of total emission reduction potential. Realizing hydrogen's emission reduction potential relies on the rapid development of hydrogen production, transportation, and utilization technologies. Firstly, the development of on-site electrolysis for hydrogen production and early deployment of industrial hydrogen applications should be prioritized to stimulate overall growth of hydrogen industry and cost reduction. Secondly, vigorous development of renewable energy electrolysis and hydrogen end-use technologies like fuel cells should be pursued, along with the demonstration and promotion of hydrogen transportation technologies. Lastly, further advancement of carbon market mechanisms is essential to support the widespread adoption of hydrogen technologies.

Carbon Leakage Concept after Carbon Pricing & Green Deal Policies

As part of the European Green Deal, EU nations are required to decrease their carbon emissions by 55% by 2030 and reach carbon neutrality by 2050. The EU's emissions trading system is the cornerstone of this goal. In theory, rising carbon prices may cause carbon leakage, or the transfer of economic activity and related emissions from high-carbon economies to low-carbon economies. Losing market share to rivals in international rivalry might result in short-term international carbon leakage. In the long term, it can be accomplished by moving domestic businesses abroad. To date, a variety of tools, including offsets and free allowances granted under the ETS, have been used to support the carbon leakage risk of high-risk industries. This paper develops an international technique, the EU Emissions Trading Scheme (ETS) Phase IV consultation, to produce a sector-level risk assessment of carbon leakage in Türkiye. This methodology combines emissions intensity and trading intensity, two important indicators for assessing carbon leakage risk. Although the former is commonly employed as a measure of a company's exposure to carbon costs, the latter indicates its ability to pass on costs to customers without losing market share. According to the carbon risk study carried out in Türkiye for the aluminium, cement, paper, fertilizer, iron-steel, and ceramics sectors, cement has the highest risk, while paper carries the lowest risk

Has the EU Emissions Trading System Worked Properly?

Has the EU Emissions Trading System Worked Properly?

Did the Glasgow COP26 negotiations meet or miss Article 6 (carbon markets) of the Paris Agreement? A systematic review of the literature

AbstractThe Paris Agreement is an important milestone in international climate policy and the associated negotiations of the United Nations Climate Summit under the United Nations Framework Convention on Climate Change (UNFCCC). Article 6 of the Paris Agreement is a supplementary mechanism—regarding carbon markets—to reduce greenhouse gases and achieve the UNFCCC's main objective of stabilizing greenhouse gas concentrations. The 2021 United Nations Climate Summit in Glasgow (COP26) played a key role in the pursuit of this goal. Via an overview of Article 6 negotiations in past COP summits and a systematic review and qualitative meta‐synthesis of the literature leading up to COP26, I identify three arguments involving Articles 6.2, 6.4, and 6.8 behind the selected literature. I substantiate these arguments based on the meta‐evaluation of the existing literature and propose a three‐stage meta‐evaluation of the arguments on Article 6 (carbon markets) of the Paris Agreement in the context of COP26 to ascertain if the negotiations were successful in leading to requisite agreements on Article 6. I conclude that future qualitative research should focus on Articles 6.4 and 6.8 of the Paris Agreement and examine the outcomes of future climate debates to see how ideas will flow through the negotiations regarding these two articles to pursue the goal of the UNFCCC under the Paris Agreement.Related ArticlesJihyung Joo, Jihyung, Jouni Paavola, and James Van Alstine. 2023. “The Divergence of South Korea's Emissions Trading Scheme (ETS) from the EU ETS: An Institutional Complementarity View.” Politics & Policy 51(6): 1155–73. https://doi.org/10.1111/polp.12566.Nunes Silva, Carlos. 2012. “Policy and Evidence in a Partisan Age: The Great Disconnect—By Paul Gary Wyckoff.” Politics & Policy 40(3): 541–43. https://doi.org/10.1111/j.1747‐1346.2012.00363.x.Robles, Pedro, and Daniel J. Mallinson. 2023. “Catching up with AI: Pushing toward a Cohesive Governance Framework.” Politics & Policy 51(3): 355–72. https://doi.org/10.1111/polp.12529.

Hedging Carbon Price Risk on EU ETS: A Comparison of Green Bonds from the EU, US, and China

This article aims to examine the hedging effect of green bonds in the US market, the European market, and the Chinese market on carbon price risk in the European Union Emission Trading System (EU ETS) from 2021 to 2023. By using daily datasets extracted from Bloomberg and the Vector Error Correction Model (VECM), the research provides evidence of the hedging effect of green bonds in all three markets on carbon price risk in the EU ETS. The paper concludes that the hedging ratio is positive for green bonds in the EU and China, while the figure for the US market is negative. Moreover, there is a positive effect of oil prices on carbon returns in EU ETS. Meanwhile, the opposite is found for stock prices.

Facilitating a Sustainable Aviation Fuel Transition in Italy

Civil aviation significantly contributes to “hard-to-abate” emissions, responsible for 2% of global CO2 emissions. This paper examines the most effective policies to promote Sustainable Aviation Fuels (SAFs) in Italy, using a multi-level policy analysis and a stakeholder-based case study approach. The policies reviewed comprise the international, European, and national level. The paper analyses at the international level, ICAO CORSIA and, at the European level, the Renewable Energy Directive (RED), ReFuel EU, and the EU Emissions Trading System (EU ETS) for aviation. Italy has not yet implemented specific policies targeting SAF transition, which is challenging due to commercialization issues and policy inconsistencies. These include the price gap between SAF and conventional fuels, different definitions adopted, and environmental objectives pursued with respect to sustainable fuels by ICAO and the EU. Other challenges include double-counting risks and fuel tankering practices. This article contributes to Italy’s SAF policymaking by developing a stakeholder-based quantitative survey, whose results suggest that three measures are key: tax subsidies for technology and infrastructure users, tax credits for upgrading production infrastructure, and tax breaks for SAF-using companies, fuel handlers, and distributors.

EU emissions trading in the buildings sector – an ex-ante assessment

ABSTRACT The EU ETS is one of the first emissions trading schemes in the world and has contributed to the reduction of greenhouse gas emissions in the sectors covered by the scheme in recent years. The EU has adopted the introduction of a new, separate emissions trading scheme (ETS 2) for the buildings and transport sectors as well additional sectors. In our paper we estimate the impact of the new ETS 2 on the buildings sector. We calculate the greenhouse gas emission reduction in the year 2030 using an approach based on price elasticities. We further discuss the impact of the ETS 2 on cost-effectiveness of heat pump deployment in the EU Member States to outline an example of longer-term effects on investments. The results show that with a carbon price of 45 Euro per ton the impact ranges between three and seven Million tons of greenhouse gas emission reductions. Even with optimistic assumptions on the reaction of building owners, the overall contribution of the ETS 2 to meeting the EU target for reducing greenhouse gas emissions in the year 2030 is limited. The results furthermore show that the carbon price needed to make heat pumps competitive in the use phase differs largely between the Member States, where in three Member States the required level exceeds 100€/t CO2eq. We conclude that in addition to carbon pricing under the ETS 2, a strong policy framework is needed for the transition of the buildings sector. Key policy insights The new carbon pricing scheme in ETS 2 contributes to the reduction of greenhouse gas emissions in buildings in the EU, however its impact on the EU energy and climate targets for the year 2030 is limited. Carbon pricing supports the diffusion of heat pumps, however a price of 45 €/t is insufficient to make heat pumps competitive even in the operation phase in several countries. Due to the low price elasticities and the long investment cycles in the buildings sector, a strong policy mix is needed in addition to carbon pricing.

Carbon Market for Climate Projects in Russia: An Overview of Nature-Based and Technological Carbon Offsets

Climate projects can become one of the key tools for decarbonization in Russia. They have powerful potential in terms of solving the problems of reducing emissions and increasing the absorption of greenhouse gases, as well as monetization potential for businesses. Despite the geopolitical crisis and sanctions imposed on Russia, certain opportunities for implementing climate projects have remained accessible. This study aims to provide a comprehensive analysis of the current status, including the regulations and approved methodologies, prospects, and challenges for climate projects in the carbon market in Russia. It also offers an overview of international carbon market mechanisms and analyses the advantages and disadvantages of the nature-based and technological solutions of climate projects for carbon sequestration. This, in turn, can facilitate the realization of future strategies for realizing the bigger potential of Russian climate projects in the domestic and international carbon markets. This research also provides up-to-date data on the current situation of the carbon market in Russia.

Leadership in EU policy-making: a deep dive into the extension of the EU emissions trading system

ABSTRACT This article offers insights into how leadership can be provided to advance the EU policy-making process through a case study of the policy-making for the new EU emissions trading system for buildings, road transport and additional sectors (ETS-2). Conceptually, it contributes to the literature on leadership in the EU by developing a three-part framework for observing leadership in EU policy-making, focussing on the intentions of an actor, the effects of the actions of an actor and the perceptions of other actors. The article also contributes to the literature on interactions between leaders in EU policy-making. Empirically, we provide a process tracing analysis of leadership in the policy-making process for the ETS-2. Using our framework, we examine five key leadership moments, showing how Denmark provided cognitive leadership, Germany provided exemplary and structural leadership, and the Commission and rotating Presidencies provided cognitive and entrepreneurial leadership. Our empirical analysis shows that various types of leadership were partially simultaneously and partially consecutively provided, with some leaders following up on the leadership strategies of others. We term this dynamic ‘sequential leadership’. Our finding confirms the importance of seeing leadership as a relationship, not just between leaders and followers, but also amongst leaders.