CO2 Emission Allowances Research Articles

Optimization of Midrex Direct Reduced Iron Use in Ore‐Based Steelmaking

Iron and steel industry contributes by more than 5% to the global anthropogenic CO2 emissions, so new ways to reduce the emissions in this industrial sector must be found. In order to facilitate a transition to more sustainable production concepts, economic factors must be considered. The potential of using direct reduced iron from the Midrex process, based on shaft furnace technology, as a partial substitute of pellets in a blast furnace was studied in the paper. Mathematical models of the different operations in a steel plant, including the shaft furnace, form the basis of the model of the system, which was optimized by non‐linear programming with respect to costs. The main objective was to analyze the prerequisites for an economically feasible operation of a steel plant integrated with a direct reduction plant under different raw material prices and varying costs of CO2 emission allowances. The results illustrate the conditions under which it would be beneficiary in a steel plant to integrate the shaft furnace in the operations. The implications of the integration on the overall CO2 emissions of the plant are also discussed.

Nash equilibria for coupling of CO2allowances and electricity markets

In this note, we analyze Nash equilibria between electricity producers selling their produc- tion on an electricity market and buying CO2 emission allowances on an auction carbon market. The producers' strategies integrate the coupling of the two markets via the cost functions of the electricity production. We set out clear Nash equilibria that can be used to compute equilibrium prices on both markets as well as the related electricity produced and CO2 emissions released. R esum

The forecasting accuracy of implied volatility from ECX carbon options

This study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2 emission allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.

Energy prices and CO2 emission allowance prices: A quantile regression approach

We use a quantile regression framework to investigate the impact of changes in crude oil prices, natural gas prices, coal prices, and electricity prices on the distribution of the CO2 emission allowance prices in the United States. We find that: (i) an increase in the crude oil price generates a substantial drop in the carbon prices when the latter is very high; (ii) changes in the natural gas prices have a negative effect on the carbon prices when they are very low but have a positive effect when they are quite high; (iii) the impact of the changes in the electricity prices on the carbon prices can be positive in the right tail of the distribution; and (iv) the coal prices exert a negative effect on the carbon prices.

Future CO2 Emissions Allowances and Inequality Assessment under Different Allocation Regimes

The Summary for Policymakers of Working Group I (WGI) contribution to the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) presents three probabilities with different cumulative emissions to limit the global temperature rise to 2°C or less. In this paper, based on the latest information, allocation quotas for major countries and regions were determined under typical schemes between 2011 and 2100. It was found that the countries’ allocation quotas all increase with enlarging global emissions permit but with different growth rates under each allocation regime, and given global emission permit, changing in scheme parameters also has some impact on each country's allocation quota. Allocation regimes were also evaluated from the perspective of equality based on cumulative emission per capita, finding that the regimes considering historical responsibility for emissions can effectively reduce the inequalities of global emissions; And regimes incorporating ability to pay are useful in further reducing emissions inequalities between Annex I and non-Annex I groups.

Possibilities of Multiagent Simulation Model Application in the Emission Allowances Trading Area

This paper is focused on possibilities of simulation of emission allowances trading within the EU emission trading system, using new designed multiagent simulation model, which integrates different original soft computing and decision making methods. Firstly, the paper presents the background of the EU emissions trading system and an overview of different methods used in current research connected with CO2 emission allowances trading. The great contribution of presented paper is the simulation model. This model consists of submodels like model of emission allowances trading of agents – companies and model of ministerial supervision. Each model is described in terms of unconventional modeling methods (like soft computing and decision making methods). In the discussion part, the possibilities of practical usage of created multiagent simulation model in decision making process in companies and public economics are suggested.

Feasibility of Solid Fuel CLC Plant Investment in the Future Energy Systems Including High Share of Solar and Wind

It is predicted that share of solar and wind energy will be increased in the future energy systems. The competitiveness of these technologies is further improved if strict climate policy and for example consequent high costs for CO2 emissions or emission performance standards will be applied, leading to increased electricity prices. This will bring demand for more flexible large scale energy production and/or energy storages due to the intermittency of solar and wind energy production at different timeframes, for example between day and night and different seasons. In addition, it is notable that future integration of electricity markets and grids will expand the area impacted by intermittent renewables. Possible and predicted high economic value for CO2 emissions and emission standards are also a rationale for the development of CCS technologies. After the investment, variable operational expenditures of solar and wind power are low in comparison with other low carbon technologies and therefore these plants are utilised before others. This will impact also on the utilisation rates of plants equipped with CCS. In this paper techno-economic analyses of industrial scale Chemical Looping Combustion (CLC) power plant are presented in different market situations. Feasibility of CLC investment and the utilization of such plant is investigated and compared to oxyfuel and air combustion references in energy system which contain high share of solar and wind power. The CC-Skynet™ toolkit, created by VTT during Finnish CCS projects, enables comparison of economic feasibility of different CCS technologies in different market scenarios, including varying prices for electricity, CO2 emission allowances, fuels, plant utilisation rates, etc. In addition, in the case of CLC, sensitivity analysis are possible also for example for prices of different oxygen carriers, investments etc. The toolkit is highly versatile but it does not include modelling of any physical phenomena which are required as inputs. The economics of CCS are evaluated from investor's (local energy company) point of view including the effects on the existing energy system. Effect of CCS on greenhouse gas (GHG) emissions and operation economics of the CCS cases are compared to the reference energy system with varying parameters of operation. Electricity production efficiency of CLC power plant is higher than in power plants based on solid fuel and other CO2 capture technologies, because CLC does not require large air separation unit or solvent regeneration. Higher net efficiency in electricity production by CLC results lower specific production costs in comparison to other CCS technologies. This probably leads to higher utilisation rate for CLC which is important for example in terms of payback time for the investment or required break- even price for CO2 emissions. Results show that CLC may be more competitive in comparison to other CCS technologies due to higher electrical efficiency. Economic feasibility is dependent on several factors which are uncertain in the case of future energy system. However, it is probable that high CO2 prices lead to increased electric price such that electrical efficiency has large dominant effect on feasibility. Investment costs do not dominate in comparison between CCS technologies. Feasibility of CCS is different between geographical locations due sensitivity of transport and storage.

Singular forward–backward stochastic differential equations and emissions derivatives

We introduce two simple models of forward-backward stochastic differential equations with a singular terminal condition and we explain how and why they appear naturally as models for the valuation of CO2 emission allowances. Single phase cap-and-trade schemes lead readily to terminal conditions given by indicator functions of the forward component, and using fine partial differential equations estimates, we show that the existence theory of these equations, as well as the properties of the candidates for solution, depend strongly upon the characteristics of the forward dynamics. Finally, we give a first order Taylor expansion and show how to numerically calibrate some of these models for the purpose of CO2 option pricing.

Complex analysis of the optimal coefficient of the share of cogeneration in district heating systems

In cogeneration units cooperating with district heating systems the power rating of the turbine must not be chosen to cover the maximum demand for heat. This depends on the character of the duration curve of external temperature conditioning the heat demand for space heating and ventilation. The power rating of the turbine in a CHP (combined heat and power) unit ought to be chosen according to the optimal coefficient of the share of cogeneration. This coefficient defines the ratio of the maximum heat flux from the heating steam turbine to the maximum demand for heat. The optimal coefficient of the share of cogeneration depends mainly on the ratio of heat required for the production of hot tap water to the heat needed for space heating and ventilation, and additionally on the benefits of promoting high-efficiency cogeneration, biomass co-firing and the increase of the power output of the turbogenerator during the peak load time thanks to thermal storage. The paper presents a complex algorithm for choosing the optimal coefficient of the share of cogeneration in district heating systems. The final results of investigations are empirical equations describing the influence of those factors on the optimal value of the share of cogeneration in district heating systems with or without thermal storage. The wish of the EU to reduce CO2 emissions in order to protect the climate has made the authors find it necessary to assess the influence of CO2 emission allowance on the value of the optimal coefficient of the share of cogeneration. The free CO2 emission allowances during the transitional period have not been taken into account due to the lack of final political decisions in this matter. The thermo-economical impact of biomass co-firing on the optimal value of the share of cogeneration has been assessed based on the present support obligatory in Poland; also the planned new Polish act for RES (renewable energy sources) has been analysed as one of the scenarios. In the absence of a final version of the new RES act, the authors assumed a complete withdrawal of supporting the biomass co-firing technology in centralized systems, which seems to be the intention of the Polish legislature. It has been assumed that the support of high-efficiency cogeneration will be continued according to the existing model. The approach presented in the paper may be applied both in back-pressure CHP plants and in extraction-condensing CHP plants.The presented paper partially sums up previous publications of both authors and introduces new empirical equations concerning a CHP unit with an extraction-condensing turbine, taking into account biomass co-firing and thermal storage. The authors show also the practical implementation of the presented results of complex analysis in the computer application CHP_Strateg for creating a high-efficiency, large-scale cogeneration strategy.

The Information Content of Carbon Options

This study analyses the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of CO2 emissions allowances (carbon options) traded on the European Climate Exchange. We demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options. It is also directionally accurate in predicting future volatility changes. However, we also find that implied volatility of carbon options is biased and informationally inefficient, especially for periods of time which do not coincide with the remaining life of the option. This suggests that the market has yet to fully mature.

Towards More Sustainable Ironmaking—An Analysis of Energy Wood Availability in Finland and the Economics of Charcoal Production

Replacement of fossil carbon by renewable biomass-based carbon is an effective measure to mitigate CO2 emission intensity in the blast furnace ironmaking process. Depending on the substitution rate of fossil fuels, the required amount of biomass can be substantial. This raises questions about the availability of biomass for multiple uses. At the same time, the economic competitiveness of biomass-based fuels in ironmaking applications should also be a key consideration. In this assessment, availability of energy wood, i.e., logging residues, small-diameter wood and stumps, in Finland is discussed. Since biomass must be submitted to a thermochemical process before use in a blast furnace, the paper describes the production chain, from biomass to charcoal, and economics related to each processing step. The economics of biomass-based reducing agents is compared to fossil-based ones by taking into account the effect of European Union Emissions Trading System (EU ETS). The assessment reveals that there would be sufficient amounts of energy wood available for current users as well as for ironmaking. At present, the economics of biomass-based reducing agents in ironmaking applications is unfavorable. High CO2 emission allowance prices would be required to make such a scheme competitive against fossil-based reducing agents at current fuel prices.

Mean reversion of stochastic convenience yields for CO2 emissions allowances: Empirical evidence from the EU ETS

This paper examines the mean-reversion property and volatility features of stochastic convenience yields for CO2 emissions allowances by using ADF, ECM-GARCH and ECM-TGARCH models. Empirical results show that the convenience yields for CO2 emissions allowances exhibit time-varying trends when different maturities are considered, and that convenience yields exhibit a linear mean-reverting process. We also find that the volatility of convenience yields exhibits a mean-reversion process and asymmetric leverage effect using ECM-GARCH (1,1) and ECM-TARCH (1,1) models. Unfavorable market information has a higher impact on this volatility than favorable market information, and unfavorable market information has a lower effect on the long-term volatility of convenience yields.

Costs and Potential of Carbon Capture and Storage at an Integrated Steel Mill

In this study different possibilities and the feasibility of applying carbon capture at an integrated steel mill based on blast furnace process, in order to reduce carbon dioxide emissions were studied. Technologies considered for capturing of CO2 are post-combustion carbon capture (PCC) and oxygen blast furnace route (OBF). Post-combustion capture for the integrated steel mill was evaluated in an earlier study by Arasto et Al. and Tsupari et Al. [1,2]. Implications of different capture amounts, different solvents for post-combustion capture and process integration levels to the greenhouse gas balance and operation economics are compared to the steel production base case with varying costs of CO2 emission allowances. Furthermore the effect of reducing the carbon intensity of steel production on the final steel production cost is evaluated.Iron and steel industry is responsible of around 5% of the overall global CO2 emissions [3]. Steel production based on the blast furnace and basic oxygen furnace-based route is the main technology corresponding to the growth in global steel production [4] and this technology route is also the main source of CO2 emissions in the iron and steel industry.The assessment of potential and cost for carbon capture and storage in the iron and steel industry is based on a case study on Ruukki Metals Oy's steel mill in Raahe. The mill is situated on the northeastern coast of the Gulf of Bothnia. It is the largest integrated steel mill in the Nordic countries producing hot rolled steel plates and coils. It is also the largest CO2 point source in Finland emitting approximately 4 Mton of CO2/year. Raahe steel mill produces district heat for use in the town nearby as well as for use onsite for heating of the premises. The power plant is connected to the national electricity grid, and thus it is possible to buy and sell electricity across system boundary.In contrast to power plant applications of CCS, CO2 emission sources at an integrated steel mill are scattered around the industrial site and the flue gases are led to several stacks. Due to this, the capture process evaluation is much more complex and requires system level optimization. Carbon capture processes and process integration options were modeled using Aspen Plus process modeling software and the results were used to estimate CO2 emission reduction possibilities and carbon abatement costs at the integrated steel mill from an investor's point of view. Different heat integration options and heat utilization scenarios were investigated and optimized with a custom-built CC-Skynet™ economics toolkit. Heat available for solvent regeneration varies between these heat utilization scenarios and thus different capture amount are investigated depending on the heat available for solvent regeneration in different case studies. Also different technologies related to oxygen blast furnace were considered, both for oxygen production and for top gas treatment. The application of oxygen blast furnace effects directly e.g. to the coke consumption of process and power production on site, and thus a new design considering new heat and process gas integration opportunities is essential.With a whole chain approach, including CO2 capture, processing, transport and storage, results show significant reduction potential at an integrated steel mill with carbon capture technologies. Ship transportation of CO2 is considered due to the location of the installation. Results show also the cost structure and feasibility of the studied technologies. Cost breakeven points for carbon capture at an integrated steel mill, for the plant owner and costs for globally avoided emissions are calculated. The study also reveals some major technical restrictions of the application. Finally the pros and cons of the technologies are compared and the role and potential of CCS as a carbon abatement tool in the European steel industry is considered.

Futures price dynamics of CO2 emission allowances

We analyze the pricing and lead–lag relationship between spot and futures prices of CO2 emission allowances in the EU emission trading scheme. We show that the cost-of-carry hypothesis between spot and futures prices holds for the trial period. In this period we focus on how fast a deviation from equilibrium due to shocks is restored. We derive testable restrictions on the loading coefficients and the short term dynamics within a vector error correction model. Previous studies in this field did not take into account the effects of lagged differences in the determination of the speed of adjustment. The results indicate that deviations from equilibrium are restored faster for the futures price series maturing in 2006 than for the futures price series maturing in 2007. Furthermore, we conduct an impulse response analysis using local projections with conditional confidence bands. Finally, we give an outlook for the Kyoto commitment period which is already running. In this time period so far we find that the cost-of-carry hypothesis does not hold.

Post-combustion capture of CO2 at an integrated steel mill – Part II: Economic feasibility

In this paper the economics of the technical possibilities presented in Part I (Arasto et al., 2013) for applying post-combustion CO2 capture at an integrated steel mill were studied. Implications of different CO2 amounts captured, solvents and process integration levels to the greenhouse gas balances and economics of operation are compared to the reference case without CCS trough several case studies using variable market prices of electricity and CO2 emission allowances.The break-even price (BEP) of CO2 emissions (e.g. CO2 emission allowances), where CCS becomes more profitable than the reference case, is about 72€/t CO2 with an electricity price of 100€/MWh in the most favourable studied case using a MEA solvent. For the more advanced solvents considered, the BEP level is about 64€/t CO2. With higher prices of electricity, the costs for CCS increase rapidly. The costs for globally avoided emissions, based on a streamlined life-cycle analysis, are generally higher than the BEP's, depending on the fuels that are assumed to eventually compensate the decreased electricity production in the energy system. The amounts of captured CO2 corresponding to the above presented prices in the most favourable cases are typically in the range of 2–3Mt CO2/a, which accounts for 50–75% of the site emissions.

The Relationship between Spot and Futures CO2 Emission Allowance Prices in the EU-ETS

In this paper we investigate the relationship between spot and futures prices within the EU-wide CO2 emissions trading scheme (EU-ETS). We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EU Allowance (EUA) contracts during the pilot trading and the first Kyoto commitment period. We find that for the pilot trading period (2005-2007) the market was initially in backwardation, while after the news of sufficiently high allocations, both allowance prices and convenience yields approached zero. On the other hand, futures contracts referring to the Kyoto commitment period were less affected by the price drop. Considering spot and allowance futures prices during Phase II (2008-2012), we find that the market has changed from initial backwardation to contango with significant convenience yields in futures contracts. We attribute this deviation from the cost-of-carry relationship to three main factors: low interest rate levels in the Eurozone; market participants’ willingness to pay an additional premium for a hedge against rising prices in future periods, and, the increasing level of surplus allowances and banking during Phase II.

A stochastic fuel switching model for electricity prices

This paper develops and applies a novel electricity price model. We reproduce the merit order of a thermal-dominated electricity system by establishing a non-linear dependency of wholesale electricity prices on the prices of fuels (coal and natural gas) and of CO2 emission allowances. The coefficients are estimated using a Markov Switching Regression.This approach might prove valuable for cross-hedging positions in the fuel, electricity and emission spot markets. It is also of use for studying the degree to which electricity prices in different countries reflect fuel and emission cost. Applying the model to the electricity markets of the UK and Germany, we find that British electricity prices are quite well-explained by short-run cost factors while the German ones are less well-explained.

Modelling and forecasting fossil fuels, CO2 and electricity prices and their volatilities

In the current uncertain context that affects both the world economy and the energy sector, with the rapid increase in the prices of oil and gas and the very unstable political situation that affects some of the largest raw materials’ producers, there is a need for developing efficient and powerful quantitative tools that allow to model and forecast fossil fuel prices, CO2 emission allowances prices as well as electricity prices. This will improve decision making for all the agents involved in energy issues.Although there are papers focused on modelling fossil fuel prices, CO2 prices and electricity prices, the literature is scarce on attempts to consider all of them together. This paper focuses on both building a multivariate model for the aforementioned prices and comparing its results with those of univariate ones, in terms of prediction accuracy (univariate and multivariate models are compared for a large span of days, all in the first 4 months in 2011) as well as extracting common features in the volatilities of the prices of all these relevant magnitudes. The common features in volatility are extracted by means of a conditionally heteroskedastic dynamic factor model which allows to solve the curse of dimensionality problem that commonly arises when estimating multivariate GARCH models. Additionally, the common volatility factors obtained are useful for improving the forecasting intervals and have a nice economical interpretation.Besides, the results obtained and methodology proposed can be useful as a starting point for risk management or portfolio optimization under uncertainty in the current context of energy markets.

Evaluating the application of different pricing regimes and low carbon investments in the European electricity market

The EU-ETS is the first measure initiated by the EU to contribute to the decarbonization of the European energy sector. It is a cap and trade system that requires industries participating to the program to procure allowances to cover their emissions. Electricity Intensive Industries (EIIs) have complained that the system put their European plants at disadvantage compared to facilities located outside the EU. They have asked for actions to mitigate this effect; one of them is to have access to long term contracts with electricity suppliers, ideally with those operating carbon free plants. This paper presents and illustrates a method for assessing the impact of this measure on EIIs participating to the EU cap and trade system.We model a power market segmented in two consumer groups EIIs and the rest of the market (N-EIIs). These two groups are subject to different price regimes: EIIs purchase electricity from dedicated base-load power plants at average cost price, while N-EIIs are supplied at marginal cost. The French Exeltium and the Belgian Blue Sky consortia are existing examples of this market organization. The expanse of the territories that can be covered by these systems depends on the organization of transmission organization and on national energy position relative to carbon free generation. We examine two different types of long term average cost based contracts that differ by the organization of transmission and study their impact under different national energy policies. We formulate the problem of operations and investment in this market as a spatial equilibrium model where generators can invest in new capacity subject to different regional constraints. Transmission is organized according to a “flow based” approach as foreseen by Regulatory Authorities and Transmission System Operators in Europe. We also examine the impact of nuclear policies. CO2 emission allowances are auctioned and tradable. We describe the models and discuss their policy implications through a stylized case study of the Central Western European electricity market. Mathematical properties are provided in the Appendices published in the supplementary materials of this paper.

Carbon Emission Allocation and Efficiency of EU Countries

Reduction of CO2 emissions is increasingly important among countries that want to protect the environment against global warming and climate change. This study examines two methods of CO2 emission reduction—CO2 emission allowance and an international agreement—by applying the Zero Sum Gains Model and the Cooperation and Alliance Model. We conclude that all DMUs reach 100% efficiency after trading on the CO2 emission allowance. The international agreement also improves the average efficiency of all DMUs, but its effect is inferior to the trading of the CO2 emission allowance.