Emission Price Research Articles

Airport Slot Allocation: Development of a Network Allocation Approach Including the Co2 Price of the European Emissions Trading System (Ets)

Airport Slot Allocation: Development of a Network Allocation Approach Including the Co2 Price of the European Emissions Trading System (Ets)

Climate Change Uncertainty Spillover in the Macroeconomy

The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Does the pollutant charging system effectively reduce PM2.5 concentration? Evidence from 255 cities in China

Based on the panel data of 255 Chinese cities from 2007 to 2015, this paper empirically analyzes the impact of the Pollutant Charge System (PCS) on PM2.5 concentration. At the same time, a heterogeneous analysis of the level of economic development, pollution level, and local leadership characteristics was carried out. The results found that: First, when the levied price of sulfur dioxide emissions increases by 1 RMB/kg, the PM2.5 concentration drops by 1.307 mg/m3. Secondly, the lower the economic level, the better the effect of PCS on haze pollution control. Third, the lower the PM2.5 concentration, the better the effect of PCS on haze pollution control. Fourth, in cities where the mayor has working experience in state-owned enterprises, PCS has a better control effect on haze pollution. Finally, three suggestions were made.JEL Classification: C33; Q53; Q58

Between- and Within-Country Distributional Impacts from Harmonizing Carbon Prices in the EU

This paper examines the distributional impacts from (i) harmonizing prices for carbon dioxide emissions across sectors and EU countries and (ii) using alternative rules for carbon revenue distribution. We develop a numerical multi-country multi-sector general equilibrium model of the EU-27 economy which resolves household income deciles, based on micro-survey data on expenditure and income, and markets for fossil fuels, electricity, and (EU-wide and national) tradeable emissions rights. We find that carbon price harmonization yields efficiency gains at the EU level. The distributional effects between countries vary and depend largely on the redistribution of carbon revenues. Based on the rules currently in place in Phase IV of the EU ETS, efficiency gains flow disproportionately to low-income countries. Within-country incidence is progressive or neutral for most countries when revenue redistribution is ignored, and is not much affected by carbon price harmonization. Per-capita-based revenue redistribution rules lead to strong progressive outcomes and yield gains for low-income households. Evaluating different policy options using a social welfare function that incorporates inequality aversion suggests that there is no trade-off between efficiency and equity in harmonizing carbon prices in the EU economy.

Reconsidering Climate Mitigation Policy in the UK

The UK has pledged to cut greenhouse gases 68 percent below 1990 levels by 2030, to be emissions neutral by 2050, and to phase out internal combustion engine vehicles by 2030. Much progress has been made, but fully achieving these ambitious objectives with the current policy framework will be challenging as it involves multiple and overlapping pricing schemes with significant sectoral differences in carbon prices and may be difficult to scale up on political and administrative grounds. This paper discusses an alternative framework consisting of: (i) a comprehensive carbon price (ideally a tax) rising to at least £60 (US $75) per ton by 2030; and (ii) reinforcing sectoral policies, most importantly feebates for the transport, industrial, and building sectors. This framework could implement mitigation targets, while limiting burdens on households and firms to enhance acceptability, and still raise revenues of 0.8 percent of GDP in 2030. The UK could also leverage its COP26 presidency to promote dialogue on international carbon price floors and pricing of international transport emissions.

Climate Change Uncertainty Spillover in the Macroeconomy

The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions.

How would ambitious CO2 prices affect air transport?

In the last years, scientists as well as political activists proposed the introduction of ambitious prices for all CO2 emitting sectors, including aviation. Suggested prices range from about 45 to 350 € per ton of CO2. Such prices are considered an indispensable element of a strategy aiming at stabilizing the global temperature increase well under 2.0 degrees Celsius (Paris objective). For comparison: As of May 2020, the price for European Emission Allowances in the European Emission Trading Scheme was about 20 €/t CO2. European Air Transport has been participating in this scheme on a mandatory basis since 2012.How would such ambitious CO2 prices affect air transport? How likely are a significant increase in airfares and a corresponding decrease in demand? This paper investigates the potential impacts of high CO2 prices on airfares and growth in aviation. For this, we analyze the relevant literature and conduct some model-based estimations. In addition, we provide a rough estimate of the economic impacts in case not only CO2 but all climate relevant species from aviation (NOx, SOx, H2O, aerosols, contrails and contrail cirrus) would become subject to emission pricing.

Research on the Structural Mutation of Carbon Emission Allowance Trading Price of China

This paper conducts theoretical and empirical research on the structural mutation of China’s carbon emission allowance trading price. Firstly, it analyzes the possibility of price mutation from the perspective of market mechanism through theoretical analysis. Secondly, the Bai-Perron Multiple Breakpoint Test method is used to test the autoregressive model of the carbon valence sequence. It is found that the carbon emission price series of each pilot have multiple structural mutations, and the breakpoints often occur around the annual compliance date. It is believed that the compliance requirement is the direct internal factor that causes the sudden change in the carbon emission price structure. Combined with the observation of market transaction characteristics and the direction of price sudden changes, the analysis of the deeper internal causes of price sudden changes in the market lies in the poor ability of enterprises to actively manage quotas, low market transaction activity, and excessive total supply of quotas. Based on the problems and reasons reflected by the empirical test results, this paper finally puts forward three rationalization suggestions for the improvement of the carbon emission allowance trading market.

Dynamic tail dependence on China's carbon market and EU carbon market

<abstract> <p>This study explores the dynamic relationship between the European carbon emission price (EUA) and the Shenzhen carbon emission price (SZA) in the time and frequency domain. Since they represent major carbon emission rights prices in the markets, they show a close correlation and tail correlation between them. Given the current global implementation to reduce carbon economy and China's implementation of a dual-carbon policy, it is of great value to explore the dynamic relationship between the two major carbon markets. Firstly, this paper uses a wavelet method to decompose the returned sequence into different frequency components to certify the dependent construction under different time scales. Secondly, this paper uses a wide range of static and time-varying link functions to describe the tail-dependent. The empirical results show that under different time scales, the dependence construction between EUA and SZA has significant time variation. The results of this study have important policy implications for understanding the transmission of carbon prices between different markets, as well as for investors and policy makers.</p> </abstract>

Strategic environmental policy and international market share rivalry under differentiated Bertrand oligopoly

Abstract We analyse strategic environmental policies under international Bertrand oligopoly when firms in different industries, located in different countries, produce differentiated products. Under cooperation, emission prices always exceed the joint marginal damage from pollution. Under non-cooperation, internationally nontradable and tradable emission permit prices are always higher than the domestic marginal damage from emissions (the Pigovian tax); emission taxes can also exceed the Pigovian tax. The non-cooperative emission prices under all instruments can exceed the joint pollution damage. Internationally tradable permits generate outcomes closest to cooperation — they result in the lowest pollution and the highest welfare among all instruments under non-cooperation. Pollution is the highest and welfare the lowest with taxes. Our results provide support for allowing international trade in emission permits even when governments choose their permit levels non-cooperatively.

The Effect of Empirical Log Yield Observations on Carbon Storage Economics

An empirical model for log yield from trees is established and applied in microeconomics of carbon storage in a boreal spruce estate. The transition from pulpwood to sawlogs is a smoother function of stem diameter in the empirical data, in comparison to literature values. Correspondingly, the value transition of trees along with increasing size is gentler. Due to price premiums of sawlogs from clearcuttings, all economically feasible treatment schedules terminate in clearcutting. Best capital return rates are gained with two heavy thinnings from above before clearcutting. Present carbon emission prices allow moderate carbon storage increment if the increment is compensated by proportional carbon rent. Doubling the present carbon prices would allow strong carbon storage increments if compensated by carbon rent. Application of nonproportional carbon rent is proposed.

Reconsidering Climate Mitigation Policy in the UK

The UK has pledged to cut greenhouse gases 57 percent below 1990 levels by 2030, to be emisisons neutral by 2050, and to phase out internal combustion engine vehicles by 2030. Much progress has been made, but fully achieving these ambitious objectives with the current policy framework will be challenging as it involves multiple and overlapping pricing schemes with significant sectoral differences in carbon prices and may be difficult to scale up on political and administrative grounds. This paper discusses an alternative framework consisting of: (i) a comprehensive carbon price (ideally a tax) rising to at least £60 (US $75) per ton by 2030; and (ii) reinforcing sectoral policies, most importantly feebates for the transport, industrial, and building sectors. This framework could implement mitigation targets, while limiting burdens on households and firms to enhance acceptability, and still raise revenues of 0.8 percent of GDP in 2030. The UK could also leverage its COP26 presidency to promote dialogue on international carbon price floors and pricing of international transport emissions.

Economic and environmental impacts of raising revenues for climate finance from public sources

ABSTRACT In response to anthropogenic climate change, developed countries have committed themselves to raising 100 billion USD a year from 2020 onwards to address the needs of developing countries. In this paper, we investigate the economic consequences and CO2 emission impacts of three options for raising climate funds from public sources in developed countries: (i) CO2 emissions pricing, (ii) an electricity consumption tax, and (iii) the removal of fossil fuel subsidies. Using computable general equilibrium analysis, we find that these three options not only induce very different global costs to raise given amounts of climate funds, but also have quite diverging implications for the cost incidence between developed and developing countries. Likewise, the global CO2 emission impacts of alternative fund-raising policies differ significantly. Key policy insights CO2 emission pricing and a tax on electricity consumption in developed countries shift substantial shares of the cost burden for raising climate finance to developing countries, while the removal of fossil fuel subsidies in developed countries leads to welfare gains for developing countries. While CO2 pricing and a tax on electricity consumption lead to positive carbon leakage, i.e. increased emissions in developing countries, the removal of fossil fuel subsidies incentivizes decarbonization of developing economies through higher prices for fossil fuels. From a global cost-effectiveness perspective the removal of subsidies is the least attractive option, but it gains in attractiveness for a policy portfolio when taking into account the cost incidence between developed and developing countries, and also the impact on CO2 emissions in developing countries.

Bio-energy and CO2 emission reductions: an integrated land-use and energy sector perspective

Biomass feedstocks can be used to substitute fossil fuels and effectively remove carbon from the atmosphere to offset residual CO2 emissions from fossil fuel combustion and other sectors. Both features make biomass valuable for climate change mitigation; therefore, CO2 emission mitigation leads to complex and dynamic interactions between the energy and the land-use sector via emission pricing policies and bioenergy markets. Projected bioenergy deployment depends on climate target stringency as well as assumptions about context variables such as technology development, energy and land markets as well as policies. This study investigates the intra- and intersectorial effects on physical quantities and prices by coupling models of the energy (REMIND) and land-use sector (MAgPIE) using an iterative soft-link approach. The model framework is used to investigate variations of a broad set of context variables, including the harmonized variations on bioenergy technologies of the 33rd model comparison study of the Stanford Energy Modeling Forum (EMF-33) on climate change mitigation and large scale bioenergy deployment. Results indicate that CO2 emission mitigation triggers strong decline of fossil fuel use and rapid growth of bioenergy deployment around midcentury (~ 150 EJ/year) reaching saturation towards end-of-century. Varying context variables leads to diverse changes on mid-century bioenergy markets and carbon pricing. For example, reducing the ability to exploit the carbon value of bioenergy increases bioenergy use to substitute fossil fuels, whereas limitations on bioenergy supply shift bioenergy use to conversion alternatives featuring higher carbon capture rates. Radical variations, like fully excluding all technologies that combine bioenergy use with carbon removal, lead to substantial intersectorial effects by increasing bioenergy demand and increased economic pressure on both sectors. More gradual variations like selective exclusion of advanced bioliquid technologies in the energy sector or changes in diets mostly lead to substantial intrasectorial reallocation effects. The results deepen our understanding of the land-energy nexus, and we discuss the importance of carefully choosing variations in sensitivity analyses to provide a balanced assessment.

The impact of the global stock and energy market on EU ETS: A structural equation modelling approach

Abstract The industrial revolution has brought about great development in the economy, but it has also increased the dependence on fossil energy. The emissions of CO2 and other greenhouse gases have contradicted economic development and the ecological environment. The establishment of the EU Emission Trading System (EU ETS) has improved the global carbon emission price mechanism, but as a new commodity, its price trend will affect buyers’ risk evaluation. Therefore, it is influential to master the driving factors behind carbon emission prices and make effective predictions. First, the paper points out that the driving factors are divided into macroeconomic risk factors and energy factors. Second, the Bayesian Network is used to select variables and make prediction of carbon prices. The results show that its accuracy exceeds other machine learning algorithms. Third, a structural equation model is used to study the impact of the selected markets on the carbon market. Finally, from the perspective of global carbon emission reduction, the relationship between driving factors and the carbon futures market is explained. The empirical results show that Cotation Assistee en Continu 40, natural gas and Brent crude oil will directly affect the yield of European Union Allowances and Certified Emission Reduction futures, and the Standard Poor 500 and Global Clean Energy Index will indirectly affect the yield of European Union Allowances and Certified Emission Reduction futures. The energy market will affect the carbon market through the intermediary effect of the stock market, in which the clean energy index is the most relevant factor. From the perspective of how to improve the carbon trading system, this paper proposes suggestions for the sustainable development of the world to promote the virtuous cycle of the global carbon emission market and the high-quality development of the global economy.

Markov-switching dependence between artificial intelligence and carbon price: The role of policy uncertainty in the era of the 4th industrial revolution and the effect of COVID-19 pandemic

This paper investigates the dependence structure and dynamics between artificial intelligence (AI) and carbon prices in the era of the 4th industrial revolution. Using the NASDAQ AI price index as a measure of AI and the European Energy Exchange EU emissions trading system (i.e. certificate prices for CO2 emissions) as a measure of carbon prices, we employ time-varying Markov switching copula models from December 2017 to July 2020 that provide evidence of a time-varying Markov tail dependence structure and dynamics between AI and carbon prices. The result shows a negative dependence structure for the return series between AI and carbon prices. However, the relationship is asymmetric, indicating that there is a stronger tail dependence in the lower tails instead of the upper tails. The finding implies that AI is a favourable hedge against carbon prices, therefore indicating the diversification benefits of AI. To understand the issue in detail, we examine the effect of economic policy uncertainty, equity market volatility, and the recent COVID-19 pandemic; we find their negative effect on the dynamic dependence structure between AI and carbon prices at lower and higher quantiles. This evidence offers additional support for the safe-haven ability of AI for carbon prices.

Time-Resolved Cost Analysis of Natural Gas Power Plant Conversion to Bioenergy with Carbon Capture and Storage to Support Net-Zero Emissions.

The ongoing construction of natural gas combined cycle (NGCC) power plants is incompatible with a transition to global net-zero greenhouse gas emissions. This work evaluates the emission pricing and technology costs required to convert an existing NGCC power plant to a biomethane-based bioenergy with carbon capture and storage (BECCS) system. The conversion was evaluated using techno-economic analysis and time-resolved life cycle assessment. At current technology costs, carbon dioxide equivalent emission prices of $142 and $215 per metric ton are required to allow a BECCS conversion to compete with normal operation or shutdown, respectively, of an existing NGCC power plant. These results show further technological development must occur in parallel with emission pricing to make BECCS viable. If mid-range emission pricing estimates are implemented ($25-$105 per metric ton), BECCS capital cost targets range from $1434 to $2098 per kW of capacity, while operational costs range from $32 to $51 per MWh of electricity produced to enable conversion. These findings indicate that operational costs associated with fuel consumption and production must be significantly reduced to make a BECCS conversion viable, even with emission pricing. All data and methods of this work have been made publicly available in an open-source model.

The marginal abatement cost curve and optimized abatement trajectory of CO2 emissions from China’s petroleum industry

Assessing the marginal abatement costs (MACs) of emissions improves the understanding of the extent of current CO2 mitigation and provides regions and industries with information on how to mitigate emissions cost-effectively. This study proposes a hybrid method to evaluate the MAC. It combines the strengths of bottom-up engineering methods and top-down economy-wide methods. A parametric directional distance function is employed to estimate the MAC from an economic perspective, and the abatement level is further incorporated to generate increasing curves, similar to the outcomes derived from an engineering perspective. In addition, this method takes into consideration whether the abatement level exceeds the abatement potential with current production technologies so as to provide a more realistic estimation of the MAC curves. The proposed technique is applied in estimating the carbon emission MAC in China’s petroleum industry. The estimation results indicate that (i) the MAC of China’s petroleum industry would change from 9821 to 16,307 yuan/ton when the abatement level increases from 1 to 50%; (ii) this industry would spend 36.5 to 42.5 billion Chinese yuan annually to achieve China’s CO2 reduction target proposed in its Intended Nationally Determined Contributions (NDCs); (iii) assigning the CO2 reduction targets based on the estimated MAC curves instead of the traditional grandfathering abatement target assignment would help to save China’s petroleum industry an additional 29.97 to 33.65% in abatement costs when achieving the NDCs. The MAC curves estimated in this study indicate more accurate relationships between abatement levels and abatement costs, and hence provide decision-makers in industries and governments with a more reliable instrument to determine the prices of emissions permits, total abatement costs, and implementation strategies in an emissions trading scheme.

Electricity market design for low-carbon and flexible systems: Room for improvement in Chile

Chile was the first country that privatized all generation, transmission, and distribution services, and introduced competition in the generation segment. Nearly four decades after its creation, many features of the original electricity market design remain unchanged. In this paper, we provide a brief history of the Chilean electricity market and explain its main limitations going forward. Some of these include the use of a cost-based mechanism for spot transactions based on a merit-order curve, low temporal granularity of spot prices, missing forward markets to settle deviations from day-ahead commitments, inefficient pricing of greenhouse gas emissions due to administrative rules, and a capacity mechanism that does not reflect a clear resource adequacy target. Many of these limitations are also present in other electricity markets in Latin America that, when privatized, mirrored many features of the electricity market design in Chile. Failing to address these limitations will provide distorted incentives for the efficient entry and operation of resources that could impart flexibility to the system, increasing the cost of decarbonizing the power sector.

Flexibility premium of emissions permits

Investments in abatement technology are often characterised by irreversibility and significant implementation lags, whereas emissions permits can be traded at any time. As such, abatement and emissions permit trading systems are hardly perfect substitutes. We formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment/divestment lags and irreversibility in relation to the price of emissions permits. Using option pricing concepts, we reformulate the technology adoption problem in terms of the technology’s characteristics (irreversibility and implementation lags) and offer a conceptual quantification of the flexibility premium of emissions permits.