Emissions Trading Scheme Research Articles

Does china’s national carbon market function well? A perspective on effective market design

The emissions trading scheme (ETS) has piqued substantial interest among economists and policymakers. China officially launched the electricity sector’s national carbon emissions trading market in 2021, making it the world’s largest compliance carbon market. In contrast to the cap-and-trade (C&T) system prevalent in other economies, China’s national carbon market employs a rate-based mechanism that implicitly subsidizes the output of regulated entities; however, is it effective? This study uses a market-design theoretical framework to explore whether China’s national carbon market functions effectively and, more critically, what leads to its (slight) underperformance. We discover that policy design, policy conflicts, policy uncertainty, inexperienced market regulation, and excessive or inappropriate government intervention are the primary constraints on this emerging market, resulting in shrinking market thickness, congested market transactions, and lack of safety. For China to establish a better national carbon market, stronger market-oriented rules, appropriate market regulation, improved policy coordination, and greater electricity market reforms are required.

Analysis of the spatio-temporal evolution of sustainable land use in China under the carbon emission trading scheme: A measurement idea based on the DID model.

Sustainable development is the theme of world economic development in the 21st century. As a key part of sustainable development, sustainable land use (SLU) encompasses economic development and environmentally friendly and social progress. In recent decades, China has formulated many environmental regulatory policies to achieve sustainable development and "carbon peaking and carbon neutrality (double-carbon)" goals, among which the carbon emission trading scheme (CETS) is the most representative and provides valuable research. In this paper, we aimed to reflect the spatio-temporal evolution of SLU in China under the influence of environmental regulatory policies through an indicator measurement strategy based on the DID estimation method. The study conclusions are as follows: (1) The CETS can effectively improve SLU from the perspectives of economic development and environmentally friendly progress, and the impact has primarily been in the pilot areas. And, its effectiveness is closely linked to local locational factors. (2) With respect to the dimension of economic development, the CETS has not changed the provincial distribution patterns of SLU; rather, it continues to remain "high to low, east to west". However, regarding the environmentally friendly progress dimension, the CETS has significantly changed the provincial distribution patterns of SLU, which are characterized by spatial agglomeration with urban agglomerations such as the Pearl River Delta (PRD) and the Yangtze River Delta (YRD) as the core. (3) The screening results of the SLU indicators based on economic development showed that the CETS primarily improved the innovation capacities of pilot regions, and the impacts on economic levels were relatively small. Similarly, the screening results of the SLU indicators based on environmentally friendly progress showed that the CETS had primarily acted on reducing pollution emission intensity and strengthening greening construction, revealing only short-term effects on improving energy use efficiency. Based on the above, this paper explored the meaning and role of the CETS in more detail, with a view to providing insight into the implementation and formulation of environmental regulation policies.

The role of carbon pricing in achieving energy transition in the Post-COP26 era: Evidence from China's industrial energy conservation

Carbon pricing is expected to meet COP26 targets and carbon neutrality goals by promoting energy transition. However, the role of carbon pricing in energy transition has been challenged largely because of limited empirical evidence. Most empirical studies draw on samples with low-to-moderate carbon prices, which might underestimate the potential impact of carbon pricing with much higher prices. Accordingly, this study takes energy prices as proxies for carbon prices to estimate the price elasticity of energy consumption. It employs a mapping relationship between carbon and energy prices to conduct simulations under various carbon price scenarios. Using China's industry as an example, the following main findings were obtained. First, the price elasticities of energy consumption are heterogeneous across sectors, implying that the role of carbon pricing may be underestimated if sector heterogeneity is not considered. Second, carbon pricing could considerably decrease energy consumption, particularly in high-energy-consuming sectors, such as ferrous metals, petroleum processing, chemicals, non-metal products, as well as power and heat. Third, by adopting China's Emissions Trading Scheme, the eight planned covered sectors could achieve reductions of 8% or 19% in energy consumption with carbon prices set at 100 or 300 Yuan/tCO2, respectively, which would significantly contribute to the phasedown of coal. Therefore, carbon pricing could play an important role in achieving energy transition in the post-COP26 era.

The role of fundamentals and policy in New Zealand's carbon prices

The New Zealand Emission Trading Scheme (NZ ETS) is unique in that it includes forestry as a carbon sink (a source of unit supply). Further, the NZ ETS has been subject to many policy changes including a switch from allowing unlimited importation of units to becoming completely autarkic. In this context, we analyse the pricing dynamics for New Zealand Units (NZUs) driven by the interaction between allowances supply and demand between 2010 and 2019 and for two sets of subperiods divided by the official and actual de-link dates. Our empirical models find that international offsets negatively affected NZU returns before the actual de-link date, domestic supply after the official de-link date, and banked units between the official and actual de-link dates, and that green (mainly forestry) offsets, surprisingly, positively affected NZU returns before the actual de-link date. Our results also highlight that from a demand perspective, sectoral effects had significant relationships with NZU returns with different dynamics. Namely, manufacturing and construction activities shifted to negatively affect NZU returns after the official de-link date, implying that fixed allocative baselines have resulted in over-allocation over time. Stationary energy sector activities shifted from negatively to positively affecting NZU returns after the official de-link date probably due to their exploitation of unlimited international offset during the linking period.

Valuing investments in the Global Carbon Market Mechanism as compound real options: Lessons from the Clean Development Mechanism

AbstractThe Global Carbon Market Mechanism (GCMM) aims to incentivize national or sub‐national actors to invest in climate mitigation projects at the same time as limiting the global costs of tackling global warming. Using the worked example of the Clean Development Mechanism (CDM), this article shows that the exact valuation of a mitigation project requires the application of compound real options techniques, as it is able to account for the multi‐staged nature of a project cycle, as well as the two basic sources of uncertainty (the probability of not moving successfully to the next stage of the cycle, technical risk, and the uncertainty related to future emission reduction credit prices, market risk). Using parameters from the global database of registered CDM projects, this article illustrates that longer than projected lead times, higher than projected transaction costs, and higher than projected rates of failure lowered the value of investing in CDM projects considerably, alongside offset prices and their variability. Regulators of and participants within the patchwork of existing emission trading schemes and market mechanisms, including the GCMM (Article 6.4 of the Paris Agreement), could benefit through wider appreciation of the benefits of this valuation method.

The time-varying effects of liquidity and market efficiency of the European Union carbon market: Evidence from the TVP-SVAR-SV approach

We use the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) and causality-in-quantiles methods to explore the linkage between market liquidity and efficiency in the European Union Emissions Trading Scheme (EU ETS) during Phase III. Our findings indicate that two-way causality existed under normal and lower market conditions. Additionally, the linkage between liquidity and efficiency exhibits time-varying characteristics. Except in cases of extremely high market liquidity, the pass-through effect of liquidity on efficiency is mostly positive in the long run. The linkage is particularly stronger in the medium and long term. However, the response of liquidity to efficiency shocks is more complicated. Market efficiency generally has an overall inhibitory effect on liquidity in the short term and a promoting effect in the medium and long term. Furthermore, we investigate the impulse response during the COVID-19 period and the war between Russia and Ukraine and find that improvements in efficiency will permanently damage liquidity. Overall, the abilities of market makers and arbitrage traders, impacted by multiple factors, play an important role in the process by which liquidity affects market efficiency. By revealing and explaining the dynamic relationship between liquidity and efficiency, this research provides valuable information for policymakers and various market participants.

Income distribution effect of carbon pricing mechanism under China's carbon peak target: CGE-based assessments

China has implemented a national carbon emission trading scheme (Carbon ETS) to mitigate climate change and has set a goal to reach the peak of carbon emissions by 2030. The potential performance of the carbon tax as a supplement to the carbon ETS may contribute to achieving the carbon peaking target by reducing income inequality among the various labour forces. Nevertheless, carbon pricing places a greater burden on lower-income households than on wealthier households. In this paper, we construct a multisectoral dynamic computable general equilibrium (CGE) model and incorporate the carbon ETS and carbon tax modules with 20 labour income distributions (ID-CGE model). The results indicate that the carbon pricing mechanism has a progressive effect on income distribution and a heterogeneous effect on the income of rural and urban workers. In rural areas, the middle- and high-income labours have witnessed a higher loss in income. In contrast, in urban areas, the low-income labours have experienced a greater decrease in income. Combining carbon tax and ETS policies to achieve carbon peaking goals by 2029 is a superior strategy.

Insights from ASEAN-wide emissions trading schemes (ETSs): A general equilibrium assessment

ASEAN has not yet had any joint policy to constrain emission levels in the context of global efforts to tackle climate change and studies on such issues in the region are still scarce. This study employs a global computable general equilibrium (CGE) climate change policy-focused and electricity-detailed model to examine the impacts of emissions trading schemes (ETSs) on the ASEAN member economies. We found that Indonesia (a permit buyer) experiences much lower economic costs in the regional ETS scenarios rather than in its closed ETS market (−9% compared to −16% in real GDP). Malaysia, the Philippines, Singapore, Thailand and Vietnam act as permit sellers and experience higher economic costs in the regional ETS scenarios. It is because the balance on the current account, which is equal to the sum of the ordinary trade balance and net emissions trading revenue, is assumed to be fixed. Furthermore, the change in ratio of trade balance to regional income is also fixed. Such a setting indicates that if the net permit trading revenue is used to fully compensate for the trade balance, which is also maintained along with the changes in the regional income, permit selling countries will be worse off and vice versa if they move from their domestic ETS markets into a regional ETS market. Results also show that technological improvements can help reduce economic costs of the ETSs. In addition, renewable energy sources show strong expansions in their production levels, but they are still far from becoming dominant in ASEAN in order to significantly reduce economic costs of climate change policies. Households will also increase their demand for renewable energy in all ASEAN countries while lowering demand for fossil-based energy; however, this sector will still experience reductions in the overall electricity demand due to previous strong reliance on fossil-based energy.

Impacts of the population ageing on the effects of the nationwide emission trading scheme in China

Nowadays, population ageing is a common social phenomenon that occurs worldwide. Rapid ageing may have profound socioeconomic impacts, and thus it may influence effects of climate policy. Nevertheless, very few previous researchers have evaluated climate policy in an ageing society. In this paper, we attempt to narrow the research gap by incorporating ageing impact in climate policy evaluation. Specifically, we have modeled ageing impacts on labor supply, household electricity consumption, and health expenditure. The core of the research framework in this paper is a dynamic recursive Computable General Equilibrium (CGE) model. The model results show that population ageing tends to decrease private health expenditure but increase governmental health expenditure. In contrast, Emission Trading Scheme (ETS) decreases both private and governmental health expenditure. Both population ageing and ETS decrease labor employment, employment rate, GDP, and carbon emissions. The results imply that population ageing lays heavy burdens on social healthcare system, whilst climate policy reduces governmental health expenditure. In ageing societies, mitigation targets can be achieved less costly and more easily through implementing ETS.

Emissions and Total Cost of Ownership for Diesel and Battery Electric Freight Pickup and Delivery Trucks in New Zealand: Implications for Transition

Road freight transport contributes to a large portion of greenhouse gas (GHG) emissions. Transitioning diesel to battery electric (BE) trucks is an attractive sustainability solution. To evaluate the BE transition in New Zealand (NZ), this study analysed the life-cycle GHG emissions and total cost of ownership (TCO) of diesel and BE trucks based on real industry data. The freight pickup and delivery (PUD) operations were simulated by a discrete-event simulation (DES) model. Spreadsheet models were constructed for life-cycle assessment (LCA) and TCO for a truck operational lifetime of 10 years (first owner), this being the typical usage of a tier-one freight company in New Zealand (NZ). The whole-of-life emissions from the diesel and BE trucks are 717,641 kg and 62,466 kg CO2e, respectively. For the use phase (first owner), the emissions are 686,754 kg and 8714 kg CO2e, respectively; i.e., the BE is 1.27% of the diesel truck. The TCO results are 528,124 NZ dollars (NZD) and 529,573 NZD (as of 2022), respectively. The battery price and road user charge are the most sensitive variables for the BE truck. BE truck transitions are explored for freight companies, customers, and the government. For the purchase of BE trucks, the break-even point is about 9.5 years, and straight-line depreciation increases freight costs by 8.3%. Government subsidy options are evaluated. The cost of emission credits on the emissions trading scheme (ETS) is not expected to drive the transition. An integrated model is created for DES freight logistics, LCA emissions, and TCO costs supported by real industry data. This allows a close examination of the transition economics.

Using EGARCH models to predict volatility in unconsolidated financial markets: the case of European carbon allowances

The growing interest and direct impact of carbon trading in the economy have drawn an increasing attention to the evolution of the price of CO2 allowances (European Union Allowances, EUAs) under the European Union Emissions Trading Scheme (EU ETS). As a novel financial market, the dynamic analysis of its volatility is essential for policymakers to assess market efficiency and for investors to carry out an adequate risk management on carbon emission rights. In this research, the main autoregressive conditional heteroskedasticity (ARCH) models were applied to evaluate and analyze the volatility of daily data of the European carbon future prices, focusing on the last finished phase of market operations (phase III, 2013–2020), which is structurally and significantly different from previous phases. Some empirical findings derive from the results obtained. First, the EGARCH (1,1) model exhibits a superior ability to describe the price volatility even using fewer parameters, partly because it allows to collect the sign of the changes produced over time. In this model, the Akaike information criterion (AIC) is lower than ARCH (4) and GARCH (1,1) models, and all its coefficients are significative (p < 0.02). Second, a sustained increase in prices is detected at the end of phase III, which makes it possible to foresee a stabilization path with higher prices for the first years of phase IV. These changes will motivate both companies and individual energy investors to be proactive in making decisions about the risk management on carbon allowances.

Optimal bidding strategy of a gas-fired power plant in interdependent low-carbon electricity and natural gas markets

This work presents a bi-level optimization framework to determine the optimal bidding strategies for a strategic gas-fired power plant, exerting market power in interdependent pool-based electricity and natural gas markets, under a carbon emission trading scheme (CETS). The upper-level problem aims at maximizing the profits of the strategic player, while at the lower-level problem, the day-ahead electricity and natural gas markets are cleared sequentially, considering the provision of carbon emission allowances for conventional power producers and high penetration of wind power generation. The bi-level formulation is initially recast into a mathematical program with equilibrium constraints (MPEC), using the Karush-Kuhn-Tucker optimality conditions and duality theory, and is further reformulated into a mixed integer linear program. The proposed algorithm is applied to a Pennsylvania-New Jersey-Maryland (PJM) 5-bus power grid, incurred by transmission constraints and a single node natural gas network. Numerical simulations provide CETS-embedded electricity clearing prices and optimal bidding decisions for the strategic gas-fired power plant, under plausible power transmission congestions and natural gas prices increment scenarios.

Does carbon emission trading scheme really improve the CO2 emission efficiency? Evidence from China's iron and steel industry

The carbon trading market is an effective way to mitigate the threat of climate warming. In the context of carbon neutrality, what is the carbon emission trading scheme's carbon reduction effect? This paper answers the question by examining the carbon efficiency of China's iron and steel industry. This study first constructs CO2 emission efficiency by employing the data envelopment approach. It then uses the synthetic control method to identify the impact of the carbon emission trading scheme on the CO2 efficiency of the iron and steel industry. The results show that CO2 emission efficiency in pilot provinces increased at a 5% significance level compared with the counterfactual scenario. The carbon trading market plays a vital role in industrial CO2 emission efficiency improvement in Guangdong, Shanghai, Tianjin, Hubei, and Chongqing. From a dynamic perspective, the policy effect of enhancing CO2 efficiency becomes more prominent over time. Moreover, the effectiveness degree of the carbon emission trading scheme varies across pilot provinces, caused of regional policy differences. Based on the findings, we put forward targeted suggestions for improving the newly-established national carbon trading market.

Carbon emission trading schemes induces technology transfer: Evidence from China

Carbon emissions trading schemes (ETS) are critical environmental regulation policies that can reduce regional CO2 emissions and promote innovation. China's carbon ETS, applied at the city level, has yet to be studied for its effects on technology transfer. We investigate how carbon ETS affects technology transfer in China's prefecture-level cities using the difference in differences (DID) method. The results show that compared to the control group, technology transfer strength in the treatment group increased by 0.185 units on average. There are two directions in which technology transfer strength can be significantly increased: in-strength and out-strength. In addition, we find that carbon ETS can greatly promote technology transfer cross provinces. Furthermore, we explored the heterogeneous effects of city scale and innovation environment on technology transfer. The carbon ETS also promotes more significant effects on technology transfer in big cities. A city with a low innovation environment is not conducive to promoting technology transfer in comparison with a city with a good innovation environment.

국가 단일 탄소시장 통합 위한 중국 지역별 배출권 가격 동태 분석

As global pressure on carbon reduction has increased since the Paris Agreement, China, the world"s largest carbon emitter, is pushing to achieve its carbon net zero target by 2060. The emission trading scheme (ETS), China"s key policy tool for carbon reduction, operates in eight regional markets, and individual markets have their own reduction goals, market rules, and verification systems. In this study, the long-run equilibrium and causal relationship between regional ETS markets was analyzed through dynamic analysis of carbon permit prices in the three major markets (Hubei, Guangdong, and Shanghai) that account for 77% of China"s total emission permits. Results show that co-integration exists among the three major markets and Vector Error Correction Model (VECM) analysis indicates the existence of a partial short-run and long-run causal relationship between those markets. Since 2021, China has been promoting phased integration of regional ETS markets into a single national market. This study shows that the efficient market integration is promising.

Research on the Carbon Emission Baselines for Different Types of Public Buildings in a Northern Cold Areas City of China

Global excessive CO2 emissions have caused serious environmental and health problems, such as global warming, melting glaciers, droughts, floods, and extreme temperatures, and have become a common challenge for the world. China has set a dual carbon goal, with the peak carbon emissions before 2030. In China, the building sector accounts for 50.9% of the country’s carbon emissions. In particular, public buildings are characterized by a high carbon emission intensity, accounting for 38.6% of carbon emissions in the building sector, which affects the achievement of the dual carbon goal in China’s building sector. Establishing a reasonable baseline of carbon emissions contributes to quota management and trading of carbon emissions for public buildings in Tianjin, China, and will ultimately contribute to the reduction of carbon emissions. This study investigates the operational energy consumption and carbon emissions of 721 public buildings in Tianjin (including electricity, natural gas, and district heating). The applicability of the Quartile method and the K-means clustering algorithm was compared to determine the carbon emission baseline of different types of public buildings, such as constraint value, guiding value, and advanced value, based on which the dynamic baseline from 2022 to 2030 was determined. The results show that the advanced value, guiding value, and constraint value of the Tianjin public building carbon emission baseline obtained using the Quartile method are more reasonable than those obtained by the K-means clustering algorithm. Furthermore, the carbon emission baseline in 2030 will be reduced by 3.4~9.2% compared to 2022. This study can guide the formulation of carbon emission trading schemes, and support Tianjin’s building sector to achieve the “carbon peak”.

Potential analysis of BESS and CCUS in the context of China's carbon trading scheme toward the low-carbon electricity system

To achieve the goal of low-carbon electricity transition, the carbon capture, utilization, and storage (CCUS) and a battery energy storage system (BESS) are considered as promising tools for fossil power and renewable power, respectively, to overcome the disadvantages of high carbon intensity and fluctuant output. The potential of these two technologies in the context of carbon trading was systematically analyzed and compared using the real option approach. The results showed that the positive effect of the carbon trading on the adoption of the CCUS was more significant than that of a BESS. Specifically, the influence of the emission quota policy on the adoption of CCUS is limited at beginning because its effects on cost perception and benefit perception are counteractive. In terms of the indirect impacts of the emission trading scheme, electricity marketization can promote the utilization of CCUS and BESS. The potential revenue from selling electricity and emission quotas embodied in the additional operation time can significantly encourage fossil power enterprises to upgrade in advance. Additionally, the carbon cost delivered to the electricity price can increase the revenues of renewable power enterprises and promote the utilization of the BESS. Based on these findings, some policy implications are provided.

Comparing the Carbon Storage Potential of Naturally Regenerated Tea Trees with Default New Zealand Carbon Look-Up Tables: A Case Study

The New Zealand Emissions Trading Scheme allows landowners to be remunerated for the carbon sequestration capabilities of eligible forests established post 1990. For afforested areas of 100 hectares or fewer, carbon sequestration is estimated with the use of default carbon look-up tables administered by the Ministry for Primary Industries. However, a disparity exists between exotic pines (Pinus radiata), where carbon sequestration predictions are regionally differentiated, and native species, where carbon sequestration estimations are neither distinguished by species or locality. This paper aims to highlight this inequality by comparing the calculated carbon storage of endemic tree species with the ‘Indigenous Forest’ category in the carbon look-up tables. The carbon storage of 12-year-old naturally regenerated tea trees (Leptospermum scoparium and Kunzea ericoides) was calculated using allometric measurements and compared to the look-up tables. The results suggest that carbon look-up tables underestimate the carbon sequestration of native tea trees by 81.8%. A bimodal data distribution suggests that carbon sequestration is heavily dependent on light interception levels. It is recommended that carbon sequestration data for specific native species in different environments are collected and integrated into such tables.

Impacts of Market‐based Environmental Regulation on Green Total Factor Energy Efficiency in China

AbstractThis study employed a difference‐in‐differences design to assess the effect of market‐based environmental regulation on green total factor energy efficiency (GTFEE) in a quasi‐natural experiment that investigated China's carbon emissions trading scheme (ETS). The empirical results show that ETS had a positive effect on GTFEE. A series of robustness tests revealed that the results were robust. Potential mechanisms through which ETS can improve GTFEE include the promotion of technological innovation and the upgrading of industrial structure. The positive effects varied in different cities and different regions – the result was pronounced in eastern China and developed cities, but it was insignificant in central and western areas and developing cities. This study confirms the satisfactory performance of China's ETS in improving GTFEE, and this is relevant for other emerging countries.

A Multiple Timescales Conditional Causal Analysis on the Carbon-Energy Relationship: Evidence from European and Emerging Markets

ABSTRACT This study aims to investigate the nexus between European and emerging markets in terms of multiple-timescale conditional analysis of the carbon-energy relationship. The findings identified the price movements of fossil fuels, Granger-caused movements in the carbon price, and movements in the carbon price Granger-caused movements in the electricity price. Furthermore, it was determined that in the long term, the crude oil and gas markets may increase and the coal market may decrease their causal influence on the carbon market. Finally, the role of the carbon market in the conditional Granger-causal network was observed to weaken during Phase III of the European Union Emissions Trading Scheme. These findings imply asymmetric information spillover between the European and emerging markets, particularly in the long term.