Emission Allowances Research Articles

Business responses to climate policy uncertainty: Theoretical analysis of a twin deferral strategy and the risk-adjusted price of carbon

Climate policies are currently insufficient to meet stabilization goals and remain uncertain. This paper develops a conceptual model to illustrate investment decisions of a risk-neutral firm faced with uncertain climate policy requirements. The firm trades off lost profits from abating too much (being “long”) versus too little (being “short”). Despite risk neutrality, profits are nonlinear such that uncertainty encourages a twin deferral strategy of deferring investment in deploying abatement technology as well as in buying and holding (banking) emissions allowances. This strategy avoids risks of stranded abatement investments but suppresses carbon prices such that prices are projected to evolve through a sequence of stepwise jumps as policies mature. Prices may spike dramatically during an abatement “short squeeze” if firms must rapidly abate in tandem. To mitigate such risk, firms may engineer payoffs from abatement strategies if they have access to suitable hedging tools. These potentially include call options (the right but not obligation to purchase at a fixed price) on avoided emissions from tropical deforestation, as well as investments in R&D and price guarantees (put options) on abatement. Policy makers should support development of hedging tools while enhancing certainty over future policies.

The Impact of EU Allowance Prices on the Stock Market Indices of the European Power Industries: Evidence From the Ongoing EU ETS Phase III

The European Union Emissions Trading Scheme (EU ETS) was created in 2005 to price every ton of carbon dioxide emissions. Within this framework, EU carbon dioxide emission allowances can affect electric power industry stock performance. This article uses a multifactor market model and a panel data econometric technique to investigate the long-run impact of EU carbon dioxide emission allowances on the European power sector. We also use panel cointegration to check whether there is a long-run relationship, and fully modified ordinary least square and dynamic ordinary least square to estimate any such relationship. The panel data include a daily sample for the ongoing EU ETS Phase III (from 1 January 2013 until 22 April 2017) and data from six European Union members (Austria, France, Germany, Italy, Netherlands, and Spain). The estimated coefficients suggest that EU allowance prices have a statistically significant and positive long-run effect on the European power sector stock market in EU ETS Phase III. This potentially supports EU efforts to toughen carbon reduction regime targets in order to remove the surplus from the system.

How a choice between emission trading and tax schemes affects an environment-biased Environmental Protection Bureau's discretion?

In choosing environmental regulatory instrument and setting standards, a government relies on an Environmental Protection Bureau's (EPB) informational advantage, even though these two entities may have different preferences for internalizing environmental damage. A three-level hierarchical model between the government, the EPB and polluting firms is constructed to derive the government's optimal delegation policy for the EPB. Given the uncertainty in firms' costs and asymmetric information on transaction costs, this paper presents a demonstration of the communication process between the government and the EPB in formulating the standards of environmental regulation and choosing between the instruments of emission trading and tax schemes. This paper seeks to determine how the decisions in the environmental regulation should be delegated for the government to trade-off the cost to it of EPB's discretion versus the benefits of taking advantage of the EFB's expertise. Results suggest the bureaucratic political issue leads to a tendency towards either an emission trading or a tax scheme, depending on the direction of the EPB's environmental preferences. Compared with the case where only emission trading can be chosen, the choice of instrument results in less discretion left to the EPB in setting up the trading emission allowance and a higher tax, irrespective of whether the EPB is more or less concerned about the environmental damage than the government.

ARE CARBON LEADER INDEXES RELATED WITH CARBON PRICES UNDER DIFFERENT REGIMES?

With the rising importance of carbon markets, the new derived financial instruments and indicator indexes related to carbon markets have been raising researchers’ appetite. According to that aspect, to investigate the relationship between price formation in carbon markets and equity prices of these firms trading in carbon markets is one of the aims of this study. This study examines CO2 prices of European Union Emission Allowances and daily closing values of MSCI Low Carbon Leaders USD Dollar Price Indexes via Markov Regime Switching Models from a non-linear perspective. Among the findings, there is a relationship between the index derived from the stock performances of North American firms trading in carbon markets and carbon prices. Furthermore, the strength of the relationship increases during periods of recession identified by the MRS models.

A Two-Stage Algorithm of Locational Marginal Price Calculation Subject to Carbon Emission Allowance

To analyze the effect of carbon emission quota allocation on the locational marginal price (LMP) of day-ahead electricity markets, this paper proposes a two-stage algorithm. For the first stage of the algorithm, a multi-objective optimization model is established to simultaneously minimize the total costs and carbon emission costs of power systems. Hence, an evenly distributed Pareto optimal solution can be solved effectively by means of the normalized normal constraint method. For the second stage, a tracing model is built with the goal of minimizing the total costs of power systems and satisfying the constraints generated based on the Pareto optimal solution obtained from the first stage. Furthermore, the influence of carbon emission quota allocation on the LMP of electricity markets is analyzed, and different schemes to allocate carbon emission quotas are evaluated on a real 1560-bus and 52-unit system.

Effects of European emission unit allowance auctions on corporate profitability

During Phase 3 of the EU Emission Trading System (ETS), to remedy the so-called windfall profits obtained by companies that benefited from the free allocation of emission permits, the EU introduced an auction-based method for the allocation of carbon emission allowances. We estimate the effect on firms' profits from participating in auctions during Phase 3 of the EU ETS using a propensity score matching approach. The work shows that the introduction of the new market mechanism for allocating carbon emission allowances has no significant effect on corporate profits, whatever the measure of profitability used. From a policy standpoint, this result seems to suggest that this new allocation mechanism might fail to improve the incentives for companies to increase their production cost efficiency or to invest in breakthrough technologies that reduce CO2. The rather flat auction price trend seems to support this conclusion.

Auswirkungen der Corona-Krise auf die europ\xe4ische Klimaschutzpolitik

ZusammenfassungNeben vielen anderen negativen Folgen hat die Corona-Krise auch direkte Auswirkungen auf den EU-weiten Handel mit Emissionszertifikaten für Treibhausgasemissionen. Dieser stellt einen Eckpfeiler der europäischen Klimaschutzpolitik dar. Den kurzfristig geringer zu erwartenden Treibhausgasemissionen stehen aufgrund der erwarteten Rezession mittel- und langfristig niedrigere Preise für Emissionsrechte gegenüber. Diese machen die gegenwärtigen Produktionstechnologien tendenziell attraktiver. Dadurch wird eine wesentliche Zielsetzung europäischer Klimaschutzpolitik, der ökonomisch-rationale Wechsel der Unternehmen auf klimafreundlichere Produktionstechnologien, erschwert.

탄소배출권 시장과 연계된 경쟁형 전력시장 연구

This study is about power generation operation of fossil fuel generators considering the greenhouse gas emissions trading market. The determination of generating power is related to fuel costs as well as consumption of the emission allowance. Therefore, the optimal generation considers both electricity market and emissions trading market at the same time. Consumption in excess of the allocated emission allowance increases sales in the electricity market, but the cost of purchasing the allowance increases. The opposite occurs when the allowance remains. The relationship between these two markets is modeled in the form of oligopolistic competition to find Nash Equilibrium(NE). The effect of marginal cost and load demand on NE is studied by analyzing the fair price for the emissions trading.

An Empirical Analysis of Changes in Market Price of Emission Allowance

배출권거래제를 시행하면서 조성한 배출권거래시장에서 배출권가격이 어떻게 변화하였는지를 제1차 계획기간을 대상으로 파악하고자 하였다. 이를 위해 제1차 계획기간의 할당배출권인 KAU15, KAU16, KAU17의 배출권가격 자료를 가지고 시장 상황을 반영한 배출권가격 변화 모형을 추정하였다. 추정 결과는 다음과 같다. 첫째, 배출권가격의 변화는 가격의 급등, 피크, 급락의 역U자형 현상을 반영하는 것으로 나타났다. 둘째, KAU15와 KAU16에서 배출권가격의 시간에 대한 주기적 비선형적 움직임은 정부의 시장안정화조치에 따른 것으로 보이는 반면, KAU17에서는 시장안정화조치에 따른 비선형적 움직임에 더해 배출권가격 자체적으로 특정 시기에 주기적으로 상승과 하락 국면을 반복하는 주기적 비선형적 움직임이 있었던 것으로 나타났다. 이러한 KAU17의 주기적 비선형성은 참여자가 적은 시장에서 특정 시기에 시장이 서는 5일장 같은 현상을 반영한 것으로 보인다. 셋째, 정부의 가격 안정화조치가 배출권가격 안정화에 기여하였다고 볼 수 있다. 그러나 이러한 현상이 KAU15, KAU16, KAU17 모두에서 되풀이되어 나타나고 있어, 정부의 안정화조치가 배출권 공급부족에 따른 가격 불안정성을 원천적으로 해소하지는 못한 것으로 볼 수 있다.

Asymmetric dependence structures between emission allowances and energy markets: new evidence from China's emissions trading scheme pilots.

This article investigates the dependence structure between China's emissions allowances and energy (coal, oil, and natural gas) markets using autoregressive conditional heteroskedasticity (GARCH) and mixed Copula functions. The dependence structures between China's eight emissions allowances and energy markets demonstrate significant regional heterogeneity; an increase (decrease) in coal, crude oil, and natural gas prices induces an increase (decrease) in eight regional emissions allowance prices and confirms regional divergence and market heterogeneity. The Beijing, Guangdong, Hubei, and Chongqing emissions allowances and coal markets demonstrate significant left-tail dependence structures, while the Shanghai, Tianjin, Shenzhen, and Fujian emissions allowances and coal markets demonstrate complex mixed dependence structures. Seven of China's emissions allowances and crude oil markets confirm the existence of complex asymmetric dependence structures, except for the symmetric dependence structure between the Fujian emissions allowances and crude oil markets. However, eight of China's emissions allowances and natural gas markets demonstrate complex asymmetric dependence structures.

Coal Demand and Environmental Regulations: A Case Study of the Polish Power Sector

The impact of environmental regulations implemented in the power industry that affect the consumption of solid fuels is of key importance to coal-based power generation systems, such as that in Poland. In this context, the main purpose of the paper was to determine the future demand for hard coal and brown coal in the Polish power sector by 2050 with reference to the environmental regulations implemented in the power sector. To achieve these goals, a mathematical model was developed using the linear programming approach, which reflected the key relationships between the hard and brown coal mining sector and the power sector in the context of the environmental regulations discussed. The environmental regulations selected had a great influence on the future demand for hard and brown coal in the power generation sector. The scope of this influence depended on particular regulations. The prices of CO2 emission allowances and stricter emissions standards stemming from the Industrial Emissions Directive and the BAT (Best Available Techniques) conclusions had the largest influence on the reduction of hard coal demand. In the case of brown coal, no new power generating units would be deployed; hence, brown coal consumption would drop practically to zero in 2050 under all the scenarios considered.

Optimal MTS and MTO Hybrid Production System for a Single Product Under the Cap-And-Trade Environment

This paper studies the optimal production planning in a hybrid Make-To-Stock (MTS) and Make-To-Order (MTO) production system for a single product under the cap-and-trade environment. The manufacturer aims to minimize the total cost in production, inventory and emissions allowances trading. The decisions include the selection of production mode (pure MTS, pure MTO or hybrid MTS/MTO), the inventory and emissions trading quantity. We derive the optimal solution analytically. We show that the cost of optimal MTO/MTS hybrid production strategy is remarkably less than that of either pure MTO or pure MTS production strategy alone. Compared with the no initial carbon quota and trading environment, there are significant differences in the optimal production decisions under trading environment. When the emissions cost is a source of costs, the manufacturer has to face more costs pressure even if there is no emissions allowance trading. In particular, the results show that the initial emissions allowance determines the optimal production decision and emissions allowance trading decision in cases where the difference between the inventory cost for per unit product and the delayed delivery cost for per unit order is between the minimum and the maximum emissions cost and has no effect on production mode and emissions allowances trading decision in other cases. These conclusions will provide optimal production decision and carbon trading decision for the manufacture under a cap-and-trade environment.

Consistency between the Granting of State Aid and the Polluter-Pays Principle: Aid Aimed at Mitigating Climate Change

Since 2009, the EU ets Directive set up a general rule for the auctioning of emission allowances. It is subject to a number of exemptions. The transitional allocation of free allowances in the electricity sector, and in general the granting of free or below-market-price allowances, are caught by the tfeu prohibition on grants of state aid. However, the EU legislature and its executive—the European Commission—are empowered to grant the EU member states exemptions in order to correct market failures. At face value, such arrangements seem to run contrary to the polluter-pays principle on account that state aid subsidizes emissions of greenhouse gases instead of internalizing their costs into the price of goods and services delivered by the recipient installations. This article explores how such arrangements amount to state aid and analyses the manner in which the exemptions are consistent with the polluter-pays principle.

Can Finance Help Save the Planet? The Case of Emission Allowances and MiFID II.

While the structure and the mechanisms that underpin the functioning of the EU ETS system are, by now, well known, discussions on the protection of the environment, and the development of secondary markets for emission allowances have stimulated a process of gradual inclusion of CO2 allowances in the perimeter of financial markets regulation. A first, significant step in this direction was taken by MiFID I: building on the definition of commodity derivatives introduced by the Investment Services Directive of 1993, MiFID I enlarged and amplified the catalogue of derivatives that would be considered as falling into its scope. The catalogue included then derivatives on emission allowances. The landscape set by MiFID I was, however, just a first step towards the inclusion of emissions trading in the scope of financial markets legislation. A second step has been taken by MiFID II, as the latter directly classifies rights on emissions allowances falling in the EU regime, as financial instruments. The reasons that led to the qualification of emissions allowances as financial instruments in MiFID II are basically a consequence of the tremendous evolution that secondary markets of allowances have seen in the last few years. The growing amount of transactions and the need to preserve and ensure the transparency and integrity of secondary markets convinced the Commission of the opportunity to include emissions allowances in the scope of MiFID II and, therefore, in the scope of the Market Abuse Directive (now, Market Abuse Regulation). Looking at the positive effects that, on environmental protection, may derive from the inclusion of emission allowances in the scope of capital markets legislation, these are basically linked to the fact that - as a consequence of the approach stemming from MiFID II - secondary markets should effectively become more transparent, efficient and secure. There are, however, some potential drawbacks to be considered. Trading in emission allowances becomes more expensive after MiFID II, and transaction costs might impact negatively on the liquidity of the market. The application of CRD IV (now, CRD V) prudential requirements might also require the absorption of important level of capitals, that would be distracted from direct investments in the industry: the effect that this might have on the system is, at the moment, unclear. The landscape introduced by MiFID II is also quite complex: there are at least two, if not three different sets of comprehensive legislation that may potentially be relevant for trading emission allowances, either on the spot, or on the derivatives market: the “old” EU-ETS; MiFID II-MAR; more tangentially, REMIT. The paper discusses the implications of each of them. Opting in and out of each of these systems, through a complicated system of exemptions and exclusions, does not benefit the overall coherence of the regulatory approach.

Eco-Efficiency Assessment of the Application of Large-Scale Rechargeable Batteries in a Coal-Fired Power Plant

This article presents the results of an eco-efficiency assessment of the application of large-scale rechargeable battery technology in electricity generation from coal. The eco-efficiency of electricity production in a 350 MW coal-fired power plant was calculated. Two production variants were compared: with the use of a lithium-ion battery of a 400 MWh capacity to optimize the operation of power blocks and without using the battery. Hard coal is one of the main fossil fuels used to generate electricity in Poland. Despite the growing share of electricity from renewable sources, this situation will persist for many more years. The main reasons for this are the high costs and long-lasting process of moving away from fossil fuels in the energy sector. Therefore, any technical solutions that can temporarily reduce the negative impact of coal-based power engineering on the environment should be considered. At the same time, the economic aspects of such solutions must be taken into account. That is why the eco-efficiency assessment method was chosen, which integrates economic and environmental aspects. The obtained results of the analyses indicate the occurrence of environmental and economic benefits resulting from the use of the battery in coal-fired power plants. It has been found that battery-based technology is more eco-efficient than technology without such a battery. A sensitivity analysis was carried out, which allowed the impact of individual computational variables on the eco-efficiency assessment result to be assessed. The results indicate that fuel prices (coal and heavy fuel oil—mazout) and CO2 emission allowances have the greatest impact on the eco-efficiency of the analyzed technology. It was also found that the factors related to the battery, such as its efficiency, life span, decrease of the capacity after 10 years of operation, and construction cost, have a much smaller impact on the results.

An analysis of the interactions between electricity, fossil fuel and carbon market prices in Guangdong, China

Using the available information and a standard econometric approach analyzing the time series dataset, this study identifies the interactions between electricity, fossil fuel and carbon market prices in Guangdong, China. The result confirms a long running co-integration between carbon market prices and the prices of coal, diesel and liquid natural gas (LNG). Conversely, fossil fuel prices have no impact on the short term dynamics of carbon prices. The price of electricity on the monthly forward market in Guangdong is significantly and positively associated with the first difference of the price of coal, but has no significant relationship with the first differences of carbon, diesel and LNG prices. This analysis provides certain implications for ongoing power sector reform and nationwide carbon market development in China. The liberalization of the power industry should be further advanced to create conditions for carbon cost pass-through on to the electricity market. Meanwhile, the national emissions trading scheme (ETS) should apply simpler and stricter benchmarks to allocate emissions allowances for the power sector. Fewer categories of benchmarks promote competition among different types of power generators and a shift to an electricity supply portfolio with lower carbon intensity. Stricter benchmarks create more demand for emissions allowances and result in higher carbon market prices. To increase the ratio of emissions allowances by auctioning is also necessary to put substantial pressure on thermal power plants to pass their carbon costs on to end users.

Effects of allowance allocation rules on green technology investment and product pricing under the cap-and-trade mechanism

Grandfathering and benchmarking are two typical initial allowance allocation rules under the Cap-and-Trade (C&T) mechanism. They establish an emission limit which carbon emission generating enterprises is permitted. To avoid penalties caused by excessive emissions or to gain profits by selling saved portions of the allowance in the carbon trading market, enterprises can invest in green technology for achieving emission reduction which results in increasing cost and leads to a change in pricing strategies. This paper formulates mathematical models to quantify the optimal green technology investment and product pricing, and compare the effects of the two allocation rules on these operational decisions and total emission. The analytical results indicate that compared to benchmarking the optimal product price under the grandfathering rule is higher. Grandfathering will induce greater emission reduction. However, benchmarking is more likely to encourage enterprises to invest in green technologies for improving their energy efficiency. Moreover, the initial emission allowance under the grandfathering rule will not affect the green technology investment. However, the benchmark emission intensity will influence the green technology decision under the benchmarking rule. When choosing from two green technologies, investment in cleaner green technologies will not be authorized, in some instances, under a range of scenarios.

Why do we suggest small sectoral coverage in China’s carbon trading market?

The coverage of Emission Trading Scheme (ETS) has been widely discussed. Based on the plans of the various stages of the National Development and Reform Commission in China, we explore the different impacts of different plans by applying recursive dynamic computable general equilibrium. What we found is different. Covering more industries, carbon prices will be lower so that the emission reduction motivation of each covering enterprises will be reduced. However, the resource attributes of carbon emission allowance will gradually emerge. In general, we found that the changes in the sectoral coverage will bring about the changes in the two effects in ETS market: carbon price effect and the allocation effect. The interaction of the two effects has led to a positive impact of both low-coverage and high-coverage on reducing emissions and improving the energy efficiency. This paper suggests that just covering three enterprises that are easy-to-MRV (monitoring, reporting, and verification) is enough for emissions reduction: cement, chemical and electric power, which can also achieve high emission reduction efficiency and can effectively reduce supervision cost.

Modeling and economic evaluation of carbon capture and storage technologies integrated into synthetic natural gas and power-to-gas plants

The production of synthetic natural gas from coal and biomass gasification made it possible to obtain a product that can be used to replace easily the standard natural gas in the existing infrastructures. This paper follows and presents a study that was conducted on a synthetic natural gas plant integrated with carbon capture and storage technologies. The recent growth in the use of energy coming from renewable sources requires that balancing measures be taken for electricity grids, which, as can be easily imagined, is best accomplished by using multiple energy storage technologies. In particular, the power-to-gas technology allows renewable electrical energy to be transformed into methane via electrolysis and subsequent methanation. Moreover, the production of synthetic natural gas can be enhanced by using concentrated CO2 emitted by synthetic natural gas plants, coupling the coal gasification and methanation processes within the same plant. This paper compares and evaluates two distinct process configurations and their implementation with power-to-gas technology in Aspen Plus v.8. During the study, it was analyzed how the introduction of carbon capture and storage technologies affect the overall energy balance, as well as the individual performances of each configuration. The two cases proved to have similar efficiency; it was also observed that the integration of and carbon capture and storage technologies resulted in a negligible reduction in the efficiency of the system (approximately 1%). The integration of power-to-gas technologies led to a decrease in the efficiency of the system up to 30%. Based on the current emission allowances specified in the rules of the regulated market of CO2, it was also assessed how such technologies would be sustainable in terms of costs derived from the production of gas.. An analysis was in fact performed to estimate the costs associated with this type of plant and the results showed that the introduction of carbon capture and storage technologies in synthetic natural gas plants had a lower impact on the costs related to both the plant and the synthetic natural gas. In this respect, a sensitivity analysis of the most influent factors was performed as well. The results showed that, when it comes to the production of gas in in the power-to-gas process, the specific cost strongly depends on the price of electricity and the operating hours.

A power development planning for Vietnam under the CO2 emission reduction targets

The paper guides three scenarios of power planning for Vietnam for the 2018–2030 period under CO2 emission targets. The analysis employs a model of energy expansion in the form of an optimization problem with the objective of the discounted entire system cost minimization. With each CO2 emission allowance, a scenario of the newly installed capacity structure will be carried out. The results indicate that instead of 42.6% coal-fired installed capacity as indicated in the National Power Development Master Plan for the 2011–2020 period with the Vision to 2030 (known as PDP VII), by 2030 the share of this power source will be around 29% (8% CO2 reduction scenario) and 19% (25% CO2 reduction scenario). Also, the lower emission sources such as hydro, wind, and solar power will be a priority for investment in the next decade. There is an existence of coal-fired power plants replacement by natural gas stations.