CO2 Emission Allowances Research Articles

Development of a CO2 emission benchmark for achieving the national CO2 emission reduction target by 2030

To achieve the national CO2 emission reduction target (CERT) in the building sector established together with the launching of POST-2020, various countries are introducing the emission trading scheme (ETS), which is considered to have a considerable effect on CO2 emission reduction. Towards this end, it is important to establish a reasonable CO2 emission benchmark for the effective allocation of CO2 emission allowances. As the previous CO2 emission benchmark, however, was focused on the industry sector (e.g., power generation sector, manufacturing sector, etc.), it is difficult to apply to the building sector. To solve this problem, this study aimed to develop a CO2 emission benchmark for allocating CO2 emission allowances in multi-family housing complexes (MFHCs). This study was conducted in three steps: (i) establishment of the database; (ii) formation of clusters using a decision tree (DT); and (iii) development of the CO2 emission benchmark for MFHCs. The nine CO2 emission benchmarks (i.e., 0.03116-0.06667 tCO2/m2year) for MFHCs were developed using a DT based on the heating type and the elapsed years, and were validated using the Kruskal-Wallis test and t-test. It was shown that using the developed CO2 emission benchmark for MFHCs to calculate the national CO2 emission reduction in MFHCs satisfied the national CERT (18.1%). On the other hand, when the CO2 emission benchmarks for MFHCs calculated based on the South Korean ETS and the EU ETS, which were applied to the industry sector, were used, the national CO2 emission reduction was −5.29 and 45.55%, respectively. The proposed CO2 emission benchmark for MFHCs may be useful for policymaking for determining the allocation of CO2 emission allowances for achieving the national CERT.

The Potential for CCUS in Selected Industrial Sectors – Summary of Concept Evaluations in Finland

The EC 2030 Framework acknowledges that CCS may have an important role in reducing direct emissions from industrial processes on the scale needed in the longer term. In this paper the potential of applying different CCUS concepts to different industrial applications in Finland has been evaluated from both the economic performance as well as the emission reduction potential point of view. The overall CO2 emissions from industry as well as the heat and power sector in Finland were in 2013 about 52 Mt of which the estimated biogenic emissions comprise about 24 Mt. The results from this work show that with a CO2 emission allowance price of 50 €/t, CCS would be economically feasible for 8 Mt CO2/a, covering transport and storage costs. Most of the cost-effective CCS applications in Finland would be in the biomass power & heat sector and in the pulp and paper industry. However, this requires that “negative” emissions from bio-CCS are acknowledged and included in the EU emission trading system. CCS does not provide a simple solution to reduce CO2 emissions in Finland as there are no suitable formations for CO2 storage, which means that CO2 export would be required. However, a range of CO2 utilisation options could be attractive.

Stochastic Differential Equation Models for the Price of European CO2 Emissions Allowances

Understanding the stochastic nature of emissions allowances is crucial for risk management in emissions trading markets. In this study, we discuss the emissions allowances spot price within the European Union Emissions Trading Scheme: Powernext and European Climate Exchange. To compare the fitness of five stochastic differential equations (SDEs) to the European Union allowances spot price, we apply regression theory to obtain the point and interval estimations for the parameters of the SDEs. An empirical evaluation demonstrates that the mean reverting square root process (MRSRP) has the best fitness of five SDEs to forecast the spot price. To reduce the degree of smog, we develop a new trading scheme in which firms have to hand many more allowances to the government when they emit one unit of air pollution on heavy pollution days, versus one allowance on clean days. Thus, we set up the SDE MRSRP model with Markovian switching to analyse the evolution of the spot price in such a scheme. The analysis shows that the allowances spot price will not jump too much in the new scheme. The findings of this study could contribute to developing a new type of emissions trading.

Convenience Yields for Co2 Emission Allowance Futures Contracts

In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation. Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of convenience yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant convenience yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the yields can be explained by the price level and volatility of the spot prices. We conclude that the yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.

Environmental costs resulting from the use of hard coal to electricity generation in Poland

In the world's fuel mix used for generating electricity, the most common fossil fuel is coal. In the EU, coal combustion and electricity generation entail the need to purchase emission allowances (EUA) whose purchase costs affect the costs of electricity generation significantly. The research described in the article shows how current market conditions shape the profitability of generating electricity from coal and how Clean Dark Spread (CDS) changes as a function of changes in energy and coal prices at the assumed levels of emission and prices of EUA allowances. The article compares the results of CDS calculations in two variants. Areas have been highlighted where prices of both coal and EUA allowances cause CDS to assume values at which the prices of generated electricity do not cover the costs of fuel (i) and CO2 emission allowances, cover all costs (ii), or constitute positive prices (iii), but still do not cover all fixed costs. With higher power plant efficiency, CO2 emissions are lower (0.722 t/MWh). The costs of purchasing fuel required to generate 1 MWh of electricity are also lower. In such case—even with relatively high prices of coal—a power plant can achieve profitability of electricity generation.

Modeling and Computation of CO2Allowance Derivatives Under Jump-Diffusion Processes

AbstractIn this paper, we study carbon emission trading whose market is gaining in popularity as a policy instrument for global climate change. The mathematical model is presented for pricing options on CO2emission allowance futures with jump diffusion processes, and a so-called fitted finite volume method is proposed to solve the pricing model for the spatial discretization, in which the Crank-Nicolson is employed for time stepping. In addition, the stability and the convergence of the fully discrete scheme are given, and some numerical results, which are compared with the closed form solution and the Monte Carlo simulation solution, are provided to demonstrate the rates of convergence and the robustness of the numerical method.

A technical evaluation, performance analysis and risk assessment of multiple novel oxy-turbine power cycles with complete CO2 capture

In recent years there has been growing concern about greenhouse gas emissions (particularly CO2 emissions) and global warming. Oxyfuel combustion is one of the key technologies for tackling CO2 emissions in the power industry and reducing their contribution to global warming. The technology involves burning fuel with high-purity oxygen to generate mainly CO2 and steam, enabling easy CO2 separation from the flue gases by steam condensation. In fact, 100% CO2 capture and near-zero NOx emissions can be achieved with this technology.This study examines nineteen different oxy-turbine cycles, identifying the main parameters regarding their operation and development. It also analyses the use of advanced natural gas (NG) combustion cycles from the point of view of the carbon capture and storage (CCS) and considering political, legislative and social aspects of deploying this technology. Six oxy-turbine cycles which are at the most advanced stages of development (NetPower, Clean Energy Systems CES), Modified Graz, E-MATIANT, Advanced Zero Emission Power AZEP 100% and Semi-Closed Oxy-fuel Combustion Combined Cycle (SCOC-CC)), were chosen to conduct a Political, Environmental, Social, Technological, Legislative and Economic (PESTLE) risk analysis. This compares each technology with a conventional combined cycle gas turbine (CCGT) power plant without carbon capture as the base-case scenario. Overall, the net efficiency of the different oxy-turbine cycles ranges between 43.6% and 65%, comparable to a CCGT power plant, while providing the extra benefits of CO2 capture and lower emissions.A multi-criteria analysis carried out using DECERNS (Decision Evaluation in Complex Risk Network Systems) software determined that, depending on the specific criterion considered, one can draw different conclusions. However, in terms of technology, environment and social opinion, the most promising cycles are the NetPower and CES cycles, whereas from an economic point of view, E-MATIANT is more competitive in the energy market. Giving each factor equal importance, the NetPower cycle must be considered to be the best oxy-turbine cycle based on our analysis.Most of the oxy-turbine cycles are still under development and only a few cycles (e.g., CES and NetPower) are progressing to the demonstration phase. In consequence, political measures such as CO2 tax and emission allowances need to be implemented for oxy-turbine technologies to become the preferred option for fossil fuel power plants burning natural gas.

Hard Coal in the Fuel-Mix Of Poland: The Long-Term Perspective

AbstractThis paper reviews the coal policy of Poland. It analyzes the forecasts of production and consumption of hard coal, the size of exports and imports and its importance for the energy sector on the basis of strategic documents. The main aim of the article is to show the role of hard coal in the fuel - energy balance of Poland until 2050. The adoption of appropriate assumptions for each scenario, including the maximum supply of hard coal from domestic mines, coal price curves, CO2emission allowances and several calculations performed allowed to obtain certain results on the basis of which the future role of hard coal was determined.

Over-Implied Models from CO2 Emission Allowance Futures Option Market

This study examines the empirical performance of emission allowance option pricing models, concentrating on the EU-ETS markets. For option pricing, we use parameters estimated from option market data whereas few papers in the extant literature use parameters from underlying asset data. As results, it is shown that the most appropriate is the one-factor model in which the EUA logarithmic spot prices follow the mean-reverting process of Ornstein-Uhlenbeck type. Also, the addition of jumps is not shown to make any significant improvement in the model performance. These results are quite striking in the sense that existing papers report the addition of jumps is necessary to improve option pricing on the EU-ETS markets. In sum, this paper is meaningful in the sense that it extends the growing empirical literature on the behavior of emission allowance spot prices

Pre-dried lignite technology implementation in partial load/low demand cases for flexibility enhancement

The contribution of Renewable Energy Sources to the electricity production is gradually increasing, and due to the stochastic fluctuations of their load curve, the necessity for flexible operation in the fossil fuel power plants is boosted. The present study examines various scenarios of lignite drying and utilization depending on power load variation of the plant during certain periods of the day, in order to simultaneously increase the plant efficiency and reduce the electricity cost. The main goal is to evaluate the economic feasibility of the concepts, the reduction in the cost of electricity and the CO2 emissions avoidance. The thermodynamic analysis of a lignite power plant includes the mass and energy balance calculations at full and partial loads using either raw or raw/dried lignite mixture. The operation of the drying system in periods when the plant operates in partial load turned out to be the most suitable mode. Economic analysis revealed that employing the proposed scenario, the increase in the income from electricity can be more than 3.5–4.0%. The annual CO2 emissions savings can reach 130,000tn. The dryer cost, the fuel price and the CO2 emissions allowances affect significantly the profit from the electricity sales.

Economic efficiency of coal gasification in Poland in reference to the price of CO2emission rights

The article presents the impact of prices of carbon dioxide on the economic efficiency of 14 coal gasification technologies employed for producing electricity, hydrogen and methanol measured with the use of NPV method. All technical, technological and economic assumptions in the assessment have been made for Polish conditions. The impact of CO2 prices were examined in the range of 30-200 PLN/Mg. The production capacity of the base technology corresponds with the fuel consumption of indicative coal having the calorific value of 20.5 GJ/Mg, used in the amount of 100 Mg/h. On the basis of the conducted research, with respect to all technical and economic assumptions, it can be stated that for the base scale there is a clear impact of prices of CO2 emission allowances above the 90 PLN/Mg CO2 . Such a level of carbon dioxide prices makes the decision concerning construction of geological sequestration systems (CCS, carbon capture and storage) worthwhile. This applies in particular to the production of electric energy. For the variants focused on hydrogen production there is a dominance of variants with CCS system only at the price exceeding 120 PLN/Mg CO2 , and in the case of methanol such a situation occurs above 150 PLN/Mg CO2 .

Operating Activities of Energy Companies in the Context of Crude Oil Risk and its Impact on the Polish Power Exchange

Different factors have significant impact on the development of the Polish Power Exchange and the volatility of electricity contracts prices, which are quoted on this part of energy market. The electricity prices are strongly influenced by such determinants as: the level of turnover volume, fuel prices, weather conditions, the CO2 emission allowance prices, political situation, the changeability of the energy demand level. The purpose of this paper is to examine and compare the volatility behaviour of world crude oil prices and electricity prices established on the Polish Power Exchange (POLPX) in the turbulent period, which covers the subprime financial crisis, geopolitical crisis, and changes in the rules of the European Union's energy policy. The background for the empirical research is a comparative analysis of business strategies of Polish energy companies and their adaptation to the factors that in the significant way influence the development of energy sector in Poland.

Detecting and modelling the jump risk of CO2 emission allowances and their impact on the valuation of option on futures contracts

Modelling CO2 emission allowance prices is important for pricing CO2 emission allowance linked assets in the emissions trading scheme (ETS). Some statistical properties of CO2 emission allowance prices have been discovered in the literature ignoring price jumps. By employing real data from the ETS, this research first detects the jump risk using a jump test and then verifies jump effects in modelling CO2 emission allowance prices by comparing the in-sample and out-of-sample model performance. We suggest a model which can capture the statistical properties of autocorrelation, volatility clustering and jump effects is more appropriate for modelling CO2 emission allowance prices. We establish a general framework for pricing CO2 emission allowance options on futures contracts with these properties and find that the jump risk significantly affects the value of the CO2 emission allowance option on futures contracts. More importantly, we demonstrate that the dynamic jump ARMA–GARCH model can provide more accurate valuations of the CO2 emission allowance options on futures than other models in terms of pricing error.

Pricing derivatives with modeling CO2 emission allowance using a regime-switching jump diffusion model: with regime-switching risk premium

Carbon markets trade the spot European Union Allowance (EUA), with one EUA providing the right to emit one tone of carbon dioxide (CO2). We examine the spot EUA returns in BlueNext that exhibit jumps and a volatility clustering feature. We propose a regime-switching jump diffusion model (RSJM) with a hidden Markov chain to capture not only a volatility clustering feature, but also the dynamics of the spot EUA returns that are influenced by change in the CO2 emission economic conditions. In addition, the switching jump intensities of the RSJM are shown to be affected by change in the carbon-market macroeconomic environment. We further derive the theoretical futures-option prices with a constant convenience yield under the RSJM via the generalized Esscher transform where regime-switching risk is priced with a risk premium. The empirical study shows that the derived futures-option pricing model under the RSJM with regime-switching risk is a more complete model than a jump diffusion model for pricing CO2 options.

Optimization of landfill Gas Use in Municipal Solid Waste Landfills in Latvia

A mathematical model was developed and applied to estimate an optimal installed capacity of a power plant that uses landfill gas as a fuel. Economic, technological and climate parameters are considered in the model. For benchmarking purposes the feed-in tariffs of power production from renewable energy sources, as well as price of CO2 emission allowances are used. A landfill in Latvia is taken as a case for modelling. The results show that it is possible to find the optimal capacity for various grades of landfill gas quality.

Modelling and computation in the valuation of carbon derivatives with stochastic convenience yields.

The anthropogenic greenhouse gas (GHG) emission has risen dramatically during the last few decades, which mainstream researchers believe to be the main cause of climate change, especially the global warming. The mechanism of market-based carbon emission trading is regarded as a policy instrument to deal with global climate change. Although several empirical researches about the carbon allowance and its derivatives price have been made, theoretical results seem to be sparse. In this paper, we theoretically develop a mathematical model to price the CO2 emission allowance derivatives with stochastic convenience yields by the principle of absence of arbitrage opportunities. In the case of American options, we formulate the pricing problem to a linear parabolic variational inequality (VI) in two spatial dimensions and develop a power penalty method to solve it. Then, a fitted finite volume method is designed to solve the nonlinear partial differential equation (PDE) resulting from the power penalty method and governing the futures, European and American option valuation. Moreover, some numerical results are performed to illustrate the efficiency and usefulness of this method. We find that the stochastic convenience yield does effect the valuation of carbon emission derivatives. In addition, some sensitivity analyses are also made to examine the effects of some parameters on the valuation results.

Possibilities for improving the thermodynamic and economic characteristics of an oxy-type power plant with a cryogenic air separation unit

In this paper the thermo-economic analysis of the oxy-type supercritical power plant integrated with the cryogenic air separation unit was presented, with the efficiency of the whole power plant of 32.26%. The reduction of energy intensity of ASU (air separation unit) was proposed by appending the membrane module. A hybrid air separation unit allows to decrease the energy intensity of oxygen production from the value of 0.226 kWh/kg O2 for the cryogenic ASU to 0.179 kWh/kg O2, for the analyzed hybrid membrane-cryogenic ASU, with an increase of the net efficiency to 33.84%. This solution causes the efficiency change by 8.7 percentage points in comparison with the reference air-fired power plant.A method of using the waste heat from the ASU and CCS (CO2 capture system) installations for the regeneration system of the steam turbine was proposed as a mean to decrease the efficiency drop. Using the waste heat in the steam turbine system causes an increase of the electric energy of the generator of turbine, and in the consequence leads to the improvement of the efficiency of the analyzed power plant by 0.5 percentage points. An economic analysis showed that the profitability of building of the oxy-type power plant in place of a conventional power plant will be higher with the price of CO2 emission allowances equal to 27.1 €/Mg CO2. All these effects of increasing the efficiency of the block can lead to lowering the cost of electricity generation by 5 €/MWh.

Long-term behaviour of CO2 emissions from cement production in Spain: scenario analysis using an energy optimisation model

During the past decade, the Spanish cement production industry has experienced constant technological updates. Nevertheless, meeting current and future environmental policy goals requires extra efforts. The Spanish case is significant because cement production went down dramatically due to the last economic crisis. This brought an important, but temporary, reduction of CO2 emissions. Therefore, there is an interesting opportunity for cement producers and policymakers to adjust the long-term targets. This work discusses the evolution of the cement industry in Spain from a realistic point of view using recent cement demand projections and the TIMES-Spain energy optimisation model. Several environmental-friendly options were implemented in TIMES-Spain following a literature review. These measures, aimed at contributing to the decrease of emissions to meet the established policy goals, include energy efficiency improvements, substitution scenarios (both for fuel and materials) and CO2 capture (post-combustion and oxyfuel). From a policy approach, the deployment of the EU ETS Directive entails that CO2 emissions from cement production will decrease by 8 Mt per year from 2030 with respect to the case without Directive. In a more technology-specific analysis, a remarkable decrease of 2–2.4 Mt CO2 was obtained in the material substitution scenario beyond 2030. Additionally, taking into account current projections for cement demand, CO2 capture technology does not emerge as a feasible option. Only if cement demand grew back to the pre-crisis level by 2050 and the CO2 emission allowances remained fixed would the CO2 capture via post-combustion start to be a reasonable alternative.

An empirical analysis of energy cost pass-through to CO2 emission prices

We use the nonlinear autoregressive distributed lag (NARDL) model to analyze the asymmetric and nonlinear pass-through effects of changes in crude oil prices, natural gas prices, coal prices and electricity prices on the CO2 emission allowance prices. We find that: (i) the crude oil prices have a long-run negative and asymmetric effect on the CO2 allowance prices; (ii) the decreases in the coal prices have a stronger impact on the carbon prices in the short-run than the increases; (iii) the natural gas prices and electricity prices have a symmetric effect on the carbon prices, but this effect is negative for the former and positive for the latter. These findings are robust when using both monthly and daily data and when considering bivariate and multivariate models.

Volatility Modelling of CO2 Emission Allowance Spot Prices with Regime-Switching GARCH Models

We analyse the short-term spot price of European Union Allowances (EUAs), which is of particular importance in the transition of energy markets and for the development of new risk management strategies. Due to the characteristics of the price process, such as volatility persistence, breaks in the volatility process and heavy-tailed distributions, we investigate the use of Markov switching GARCH (MS-GARCH) models on daily spot market data from the second trading period of the EU ETS. Emphasis is given to short-term forecasting of prices and volatility. We find that MS-GARCH models distinguish well between two states and that the volatility processes in the states are clearly dierent. This finding can be explained by the EU ETS design. Our results support the use of MS-GARCH models for risk management, especially because their forecasting ability is better than other Markov switching or simple GARCH models.