Emission Allowances Research Articles

The European Union Emissions Trading System Market Stability Reserve: Does It Stabilize or Destabilize the Market?

The Market Stability Reserve (MSR) was introduced into the European Union Emissions Trading System to address a historical surplus of emission allowances and to improve the system’s resilience to major shocks through automatic adjustments to the supply of allowances. We summarize the main strengths and weaknesses of the MSR and identify when it stabilizes the market as intended, as well as when it is destabilizing. We argue that recently proposed design changes strengthen both its stabilizing and destabilizing effects. We conclude that a price-based supply adjustment mechanism would help to address the main shortcomings rooted in the banking-based approach of the current MSR design.

Trade, equilibrium prices and rents in European auctions for emission allowances

This paper analyzes the price behavior of Phase III (2013–2020) EU-ETS emission allowances of CO2 by focusing on the dynamics of daily auction equilibrium prices and on the changes of the volatility of the underlying stochastic process. The paper derives the main testable statistical hypotheses (particularly that about the determinants of the conditional variance of prices) on the results derived in a model of optimal bidders’ behavior given the ETS auction rules. Tests are conducted by estimating various versions of GARCH models for both mean and variance equations of price return. Results show that the price dynamics is affected by factors including a measure of excess demand/offer and the number of winning bidders and that, contrary to expectations, reforms of the auction rules introduced at the end of Phase III explain a great part of the increased price volatility. The increased volatility is also positively associated with the bid spread and negatively associated with the number of bidders active in each auction round.

Borrowing-Firm Emission Trading, Bank Rate-Setting Behavior, and Carbon-Linked Lending under Capital Regulation

The article develops a capped barrier option model to evaluate a bank’s equity. We explore the effects of borrowing-firm carbon emission trading on bank carbon-linked lending, explicitly considering borrowing-firm credit risks under capital regulation. We also integrate the regulatory compensation for bank low-carbon lending with borrowing-firm carbon allowance transactions in the emission trade scheme. Results show that an increase in the regulatory low-emitter lending compensation decreases loans at an increased interest margin, contributing to bank profitability and stability. The stringent regulatory cap for carbon emission allowances hurts profitability and stability. Strict capital regulation would jeopardize bank performance.

Assesment of the Quality of Reporting Information on CO2 Emission Rights on the Example of Energy Sector Groups Listed on the Warsaw Stock Exchange

Abstract Poland is a participant to the European Union Emissions Trading System, which aims at reducing greenhouse gas emissions. Trading CO2 emission rights has become a strategic area from the point of view of managing entities that emit CO2. The aim of the paper is to investigate and identify discrepancies in the presentation and valuation of CO2 emission allowances, CO2 emission provision liabilities in reporting, and to assess the impact of these discrepancies on compliance with the true and fair view principle on top of the informative value of the financial statements. An in-depth qualitative analysis was used to examine disclosures of CO2 emission rights in the 2020 consolidated financial statements coming from the largest energy sector groups listed in the WIG Energy Index of the Warsaw Stock Exchange in light of the relevant legal acts and literature. As a result of the research conducted, it was confirmed that groups of companies carry out a range of CO2 emission rights balance classification and valuation. There were also significant discrepancies in the disclosure of information about the creation and valuation of provisions for liabilities due to CO2 emissions. The discrepancies observed in the audited entities’ balance-sheet presentations and valuation of the acquired CO2 emission allowances and reserves resulting from IAS/IFRS in practice distorts the comparability of data presented in the financial statements. The research also revealed differences in scope of disclosed information, as well as its fragmentary nature. As a result, the comparison of data between groups in the energy sector in terms of their assets is impossible. Our study fills a research gap on the effects of using IFRS for the presentation and valuation of CO2 emission rights in the Polish energy sector and the impact of a differentiated approach to disclosures on the true and fair view conception in financial reporting.

Data-Driven Optimization of Forestry and Wood Procurement toward Carbon-Neutral Logistics of Forest Industry

Investments toward a carbon-neutral forest industry will change forestry and wood procurement in Northern Finland. The changing market situation requires data-driven DSSs for the strategic management of logistics. Using this software, logistics were described by a continuing wood flow model and optimized by a dynamic method. Three logistics scenarios described wood flows in the present and in the future. The optimization minimized the economic and environmental costs, which decreased by 4.9%. However, synchronized multimodal transportation costs increased by 23.3%. Therefore, maximum logistics efficiency necessitates increases in railway transport capacity. The change would also decrease CO2 emission costs. Under scenario-specific circumstances, logistics operations could be focused on four profitable regions, increasing market shares at municipalities. To guarantee environmental sustainability of these municipalities, optimization of timber markets between forest owners and forest industry must be developed further by driving data from the EU’s emission allowance price compensation mechanism to the optimization process.

Can energy predict the regional prices of carbon emission allowances in China?

The carbon emission trading is an important market-oriented tool in the process of China's carbon neutrality, which makes companies face tremendous pressure to reduce emissions while having strong energy demands. In order to evaluate whether energy prices can be robust predictors of the prices of emission allowances, this study perform extreme bounds analysis (EBA) in four representative markets. The empirical results reveal that energy prices can indeed predict the prices of emission allowances, but the robustly predictive capabilities of different energy prices vary with regions. Among them, thermal coal is the robustly positive predictor for Guangdong, Hubei and Shanghai market; natural gas is the robustly negative predictor for all the four chosen regions; and crude oil can only positively predict Hubei market with robustness. Meanwhile, the horizons that predictions from energy to emission allowance can be performed as well as the predictive coefficients also vary with energy types and regions. And some trading implications are also provided alongside.

Auction design for the allocation of carbon emission allowances to supply chains via multi-agent-based model and Q-learning

Auction design for the allocation of carbon emission allowances to supply chains via multi-agent-based model and Q-learning

Data-driven modeling of CO2 emission-allowance compensation for wood-purchasing optimization toward carbon–neutral forest industry

The faster market changes of EU’s CO2 emission allowance price have increased operation challenges in wood supply of forest industry. The objectives of this study are to present basics of its data-driven modeling for purchasing renewable forest wood. Particularly, the effects of the changes in prices and available carbon sink are considered in management of wood purchasing at the level of the local districts. Two scenarios described procurement situations in non-renewable carbon sinks. The results were compared to the scenario in renewable carbon sink of carbon–neutral forestry. Time-varying emission-allowance parameters of models affected wood purchase and deliveries in the districts. Therefore, cost efficiency of wood-supply operations, as well as the utilization rate of renewable wood resources, can be optimized by data-driven dynamic wood-flow models in digitalized decision support. In addition, the results testify that the model optimizes wood purchasing in the districts at the way of CO2 emission allowance market. Therefore, by using the model wood-supply operations could be optimized toward carbon neutrality, which is important success factor of forest industry.

Legitimacy and Consistency of Free Allocation in the EU ETS: The Role of Substitutes in Product Benchmarks

The EU emission trading system (ETS) is the primary tool for reducing greenhouse gas emissions (GHG) and combating climate change. Free allocation of emission allowances plays an important role within this system, and will continue to do so, also after the European Commission’s ‘Fit for 55’ proposal package. This article discusses the determination of free allocation by use of product benchmarks, and the assessment of substitutability under the product benchmark system, and how they relate to the legitimacy and proper functioning of the ETS. It is argued that a coherent, ETS-specific test should be applied when the Commission assesses the substitutability that underpins the product benchmarks, and that full judicial review is warranted going forward, akin to that deployed by the EU courts in competition cases. Emission trading system, EU ETS, free allocation, benchmark, substitute

국가 석유화학 산업단지의 악취유발물질 배출특성에 관한 연구

This study analyzes and collects data for two years from 2020 to 2021 and analyzes 578 odor test data from Yeosu, Ulsan, and Seosan. Based on the analysis data by time zone, region, location, etc, this study proposes practical measures suitable for petrochemical complexes by focusing on the odor generation environment and the characteristics of inducing substances. In the case of complex odors, the Yeosu National Industrial Complex exceeded the strict emission allowance standard by six times at two points in the management area, the Daesan Industrial Complex exceeded the standard twice in the management area and affected area, and the Ulsan Industrial Complex was within the standard. In the case of ammonia, the Yeosu Industrial Complex had a detection rate of about 70.4 % compared to the Ulsan Industrial Complex, more than twice the detection rate of the Ulsan Industrial Complex at about 31.4 %. Three items out of 22 designated odors were detected in the Yeosu Industrial Complex, five items were detected in the Ulsan Industrial Complex, and four types of aldehydes were detected in Daesan Industrial Complex. Except for one detection of i-butyl alcohol at the Ulsan Industrial Complex, it was judged that few items belonging to volatile organic compounds were detected. However, due to the nature of the petrochemical complex, volatile organic compounds have been reported several times, which requires real-time air pollutant measurement vehicles or operation of odor integrated control centers linked to workplaces to quickly analyze and identify responsibility. Designated odors, which are odor-causing substances and air pollutants that account for most of the emissions from the petrochemical industrial complex, are mainly composed of carbon. This study, which investigates and analyzes the concentration data of odor substances in Korea''s three influential industries, aims to contribute to achieving the carbon neutral goal for zero carbon.

Greening of the District Heating Systems—Case Study of Local Systems

The integration of renewable energy resources into district heating systems is gaining momentum across Europe, as heat producers are expected to work towards the EU Directive of Efficient District Heating and Cooling to achieve carbon neutrality by 2050. This paper studies the techno-economic implications of transforming conventional district heating systems of six locations in Poland, generating 8.5 PJ of heat annually, into sustainable and efficient district heating systems. These new systems consist of flat solar collectors integrated with seasonal pit thermal energy storages and gas heating plants, acting as flexible heat sources, covering residual heat demand and/or increasing the parameters of the working medium in the network. Using the IEA-TIMES software, two scenarios were considered, namely STAT and DYN. The results show that reaching a 20% share of heat production by solar thermal would demand extra construction of seasonal heat storage facilities with a total capacity of 197 TJ, which is approximately 4.5 times bigger than the largest seasonal heat storage located in Vojens, Denmark. The projected increase in the prices of natural gas and CO2 emission allowances accelerates the transformation of systems towards greater use of solar heating plants. In the period 2025–2050 the heat generation costs increase by ca. 65%. The contribution of the CAPEX and OPEX costs components are presented.

Shifting concerns for the EU ETS: are carbon prices becoming too high?

Carbon prices in the EU Emissions Trading Scheme (EU ETS) have risen from around 5 euro per ton of CO2 in 2017 to above 90 euro in 2021. One probable explanation is the cancellation mechanism implemented along with the Market Stability Reserve (MSR) of the EU ETS in 2018. We identify realistic conditions under which the MSR results in truly massive cancellation of emissions allowances, pointing to the steepness of the emissions pathway over time as essential. A flattening of the emissions pathway implies huge reduction in cumulative emissions, suggesting much higher ETS prices. The concerns about too low and ‘ineffective’ carbon prices may turn into concerns for too high prices. The results have important ramifications for planned revisions of the EU ETS.

Modelling of Change in Fuel Mix within a District Heating Network

Changing the fuel mix used in the heating industry, i.e., switching to greener fuels, is one of the possible solutions to prevent rising costs for final consumers in the context of rising emission allowance prices. This paper presents a methodology that offers the possibility to perform a comprehensive technical and economic assessment of a theoretical solution—changing the fuel mix of centralized heating sources—and other strategic decisions within a district’s heating systems. Emphasis is placed on fuels with a negative price, such as municipal waste. The presented approach can also be used to assess the effect of other significant changes related to the configuration of district heating systems on the economy of the plant, such as the impact of a decrease in heat demand and implementation of a steam turbine. The key benefit of this paper is an approach based on mathematical modelling of the operation of individual boilers with different operating parameters in terms of their start-up, shutdown, and mode of operation. A unique approach of optimizing an operation’s schedule using dynamic programming is presented, which enables the selection of a suitable solution for the configuration of binary variables in consecutive time steps. In this way, it is possible to achieve a more accurate estimate of the economics of the facility at the strategic planning stage that will consider the real operational capabilities of the heat source given its technical limitations. Using this approach, up to a 4% reduction in variable operating costs was achieved in the model case, when compared to static time interval planning.

Strategic production and responsible sourcing decisions under an emissions trading scheme

Increased environmental awareness has resulted in consumers’ willingness to pay more for products with a smaller environmental footprint. Additionally, emissions trading schemes reward manufacturing firms who produce products with lower-than-average emissions rates. We examine how a manufacturer makes effective sourcing decisions, even if a supplier holds a responsibility certificate that only discloses partial information about a specific product. We also examine how a strategic production strategy (green versus traditional production) can be chosen so that the entire supply chain is motivated to become more sustainable. A game-theoretic model is developed to study the impact of an emissions trading scheme on the screening mechanism with asymmetric information and the production strategies of competing manufacturers. We first show that the performance-based contract plays an active role in driving sustainable improvements, which is consistent with practical activities occurring in the industry. We then show that a general supplier cannot receive patronage, even if the sourcing and production costs are less expensive for the manufacturer. Sourcing materials with a lower emissions rate are not a strictly dominant strategy. These findings further indicate that the equilibrium production strategy in chain-to-chain competition depends on the threshold of trading prices, the supplier’s effort, and the additional production cost per allowance saved. Moreover, even if the manufacturer has sufficient emission allowances, it still prefers to adopt the green production strategy rather than choose a cost-effective strategy to cut production and sourcing costs. The outcomes provide useful guidance for manufacturing industry practices in sustainable development.

Europe beyond coal – An economic and climate impact assessment

Several European countries have decided to phase out coal power generation. Emissions from electricity generation are already regulated by the EU Emissions Trading System (ETS), and in some countries like Germany the phaseout of coal will be accompanied with cancellation of emissions allowances. In this paper we examine the consequences of phasing out coal, for CO2 emissions, the electricity sector, and the broader economy. We show analytically how the welfare impacts for a phaseout region depend on i) whether and how allowances are canceled, ii) whether other countries join phaseout policies, and iii) terms-of-trade effects in the ETS market. Based on numerical simulations with a computable general equilibrium model for the European economy, we quantify the economic and environmental impacts of alternative phaseout scenarios, considering both unilateral and multilateral phaseouts. We find that terms-of-trade effects in the ETS market play an important role for the welfare implications across EU member states. For Germany, coal phaseout combined with unilateral cancellation of allowances is found to be welfare-improving if the German citizens value CO2 emissions reductions at 65 Euro per ton or more.

Wind Energy Market in Poland in the Background of the Baltic Sea Bordering Countries in the Era of the COVID-19 Pandemic

The economic crisis caused by the COVID-19 pandemic reinforces the problem of rising electricity prices, which mainly affects countries that are forced to pay ever-higher CO₂ emission allowance fees (e.g., Poland). In the light of signals confirming the need for intensive development of the wind energy market in the Baltic Sea region, the authors consider the need to examine this issue concerning Poland and the Baltic States (i.e., Lithuania, Latvia and Estonia) as extremely important and demanding. The development of the RES market is currently an absolute necessity. The immediate neighbourhood and similar general social and economic conditions of Poland and the Baltic States enable factual comparisons, reinforcing the rationale for choosing the adopted research area. The main objective of the study was to assess the development of the wind energy market in Poland in the background of the Baltic Sea bordering countries in the era of the COVID-19 pandemic, in order to try to answer the question: what direction of wind energy development in Poland in the realities of the COVID-19 pandemic is justified and may have an impact on limiting the increase in electricity prices in this country? In this context, it turned out to be particularly interesting to identify solutions practised in the wind energy market in the Baltic States with their potential to be applied in Poland. The research instruments were drawn from an economic analysis and evaluation of phenomena and supported by the results of our own research (questionnaire) conducted on the Polish energy market, to substantiate the findings.

The Effects of Surface Lignite Mines Closure on the Particulates Concentrations in the Vicinity of Large-Scale Extraction Activities

The European green deal and energy transition policies and the competition primarily shaped by the high price of carbon dioxide emission allowances and the consistently reduced cost of renewable energy technologies directly affect the coal and lignite extraction industry. Lignite production in Western Macedonia Lignite Centre reduced from 43.2 million tons in 2010 to 10.3 million tons in 2020. This development affects the ambient air quality of the large lignite mine area, as evidenced by the records of 10 monitoring stations incorporating the laser light scattering method. All stations measure reduced particulate matter (PM10 and PM2.5) concentrations compared to the period before 2010, while the number of annual exceedances of the limit value for the daily average PM10 concentrations has been decreased. Moreover, differences in air quality measurements of monitoring stations related to their distance from mining activities now tend to be minimized. Based on these facts, it can be predicted that, after the closure of lignite extraction and the electricity generation activities, the concentration of particulates in the atmosphere will reach the typical levels for rural areas of Southern Europe, no matter what the mines’ land reforestation and repurposing program will include.

A real options study on cook stove CDM project under emission allowance price uncertainty

South Korea is one of the countries that have been actively involved in reducing greenhouse gas emissions and global climate action as a party to the Paris Agreement. As the national emissions reduction target has been getting reinforced, an increasing number of South Korean firms have been participating into the Clean Development Mechanism (CDM) projects to secure CER credits, one of which is the ‘improved energy-efficient cook-stove distribution project’ in developing countries. The purpose of this paper is to develop a real options model to analyze investment decisions on cook-stove distribution CDM project in Myanmar, where we estimate the optimal threshold CER price that makes the investment economically feasible. We also analyze the sensitivity of the threshold price across the investment parameters. The results show that our project was economically feasible at the time the project was launched, as the KOC prices were generally higher than the investment threshold price. The sharp decline of the KOC prices in 2020, however, deteriorated the economic feasibility of the project. The results suggest that various risk factors should be incorporated before making investment decisions.

Are clean energy and carbon emission allowances caused by bitcoin? A novel time-varying method

The bitcoin market has substantially grown in recent years. The researchers are exploring its various repercussions for socioeconomic and political matters; however, the literature still lacks clear evidence on how bitcoin interacts with energy and the environment. This study aims to explore the causal relationship between bitcoin, clean energy, and carbon emissions allowances by applying the novel time-varying Granger causality test on the daily data spanning from Sept 17, 2014, to October 12, 2021. The empirical findings confirm that both clean energy and emission allowances are causally associated with bitcoin. However, this causal relationship varies over time and the duration of causality is longer as suggested by the recursive evolving procedure. The outcome is robust when bitcoin is measured by the volume and the price. Furthermore, the results obtained from robustness analysis conducted through heteroskedastic consistent test also validate the findings that bitcoin causes clean energy and carbon allowance. The findings offer a platform for government officials and policy managers to improve clean energy and carbon allowance markets for sustainable development by managing and using the tools to control and regulate cryptocurrency markets.

Climate variability and food waste treatment: Analysis for bioenergy sustainability

Although reducing food waste is essential for the necessary reduction in greenhouse gas (GHG) emissions for climate mitigation, not all food waste is avoidable. Currently, food waste is mainly disposed of in landfills in low-income countries, whereas some industrialized countries in Asia recycle a majority of their food waste as animal feed or compost. The present study therefore investigates the large-scale implementation of technological alternatives for the valorization of food waste into biogas and bioethanol. First, a projected scenario of global food waste in 2050 is provided using a data-driven model that takes into account spatial differences in the types of food waste at the country level. This scenario indicates that food-waste-related GHG emissions alone nearly reach the 2 °C target emissions allowance. Next, the food-waste-to-biogas and food-waste-to-bioethanol pathways, including the upgrading of food waste-derived acetic acid to bioethanol, are examined via large-scale modeling and analysis to estimate their potential for bioenergy production and their resulting GHG footprint. Finally, a national-scale optimization of climate mitigation benefits under alternative conversion pathways (bioethanol versus biogas) is performed. This optimal scenario indicates that the production of bioethanol using one half of all the food waste generated by the four largest waste-producing countries (China, USA, India, and Brazil) can generate 31.9–34.0 × 1018 J (or 31.9–34.0 EJ (EJ)) of renewable energy and decrease GHG emissions by 22.8–26.8 Gt CO2 eq. Furthermore, the catalytic conversion of food waste to bioethanol can potentially maximize climate mitigation to 4.0–4.8 trillion USD while preventing a 0.06–0.07 °C increase in global mean temperature change in the cumulative period of 2011–2050.