Emissions Cap Research Articles

Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve

We study the impact of a supply management mechanism (SMM) similar to the Market Stability Reserve proposed in 2015 which preserve the overall emissions cap and we comment on the recent cap-changing amendments. We provide an analytical description of the conditions under which an SMM alters the emissions abatement paths, affecting the expected length of the banking period and its variability. While abatement strategies of risk neutral firms solely depend on the former, for risk-averse firms changes in the latter would lead to higher risk premia, accelerated depletion of the bank and, consequently, further reduction of abatement and allowance prices. Cancellation of part of the reserve could partially outweigh the effect on risk premia sustaining allowance prices.

Dynamic Supply Adjustment and Banking Under Uncertainty: The Market Stability Reserve

The supply of allowances in the European Union Emissions Trading System is currently determined by a rigid allocation programme. The Market Stability Reserve (MSR) makes the allocation of allowances flexible and contingent on the aggregate bank, while preserving the overall emissions cap. We investigate under which conditions the MSR can alter the abatement and allowance price paths. We show that, for risk-neutral firms a cap-preserving MSR is largely irrelevant. The MSR will not influence the expected equilibrium allowance price or average price volatility. We then relax the risk neutrality assumption and investigate how the MSR can impact the risk of an unexpected breakdown of inter-temporal optimisation, ultimately affecting the equilibrium at different points in time. In this context, we show that changes to the timing of allowance allocation by the MSR can have a substantial impact on abatement and allowance price paths when firms are risk-averse.

Impact of Carbon Regulations on the Supply Chain With Carbon Reduction Effort

Regarding carbon emission as a principal cause of global warming, governments begin to take note of the urgency of emission reduction and propose feasible carbon regulations. Consumers also become more caring about the carbon emission factor when purchasing product. In response, the firms have exerted considerable efforts to reduce their emissions. In this paper, we investigate a supply chain facing carbon-sensitive demand market. Two major carbon regulations, absolute-cap (AC) and intensity-cap (IC), are considered. We explore the optimization problems for the centralized and decentralized models, and derive the optimal solutions for the production quantity as well as the emission reduction effort. We find that under regulation IC, a higher emission cap will lower the carbon emission of unit product but raise the total production quantity, while the emission cap is irrelevant to these operational decisions under regulation AC. In addition, the production quantity and the emission reduction effort under regulation AC are lower than those under regulation IC. We further show double marginalization within this supply chain manifests as not only a lower production quantity but also a higher unit carbon emission. Finally, numerical experiments are conducted to obtain more insights.

Governmental cap regulation and manufacturer’s low carbon strategy in a supply chain with different power structures

Considering the cap-and-trade regulation and manufacturer’s two types of strategies: adopting green technology (GT) and purchasing carbon credits (PC), we develop game models to investigate the manufacturer’s production and emission abatement decisions as well as the governmental emission cap regulation in a supply chain with three power structures (Manufacturer Stackelberg (MS), Retail Stackelberg (RS) and Vertical Nash (VN)), and analyze how a manufacturer’s low carbon strategy changes with the various governmental cap under the three supply chain power structures. The main conclusions are as follows. If the manufacturer adopts green technology strategy, supply chain power structure will not affect social welfare. High consumer’s low-carbon preference is more beneficial to the social welfare, the government should advocate the consumer’s preference for low carbon product. If the manufacturer purchases carbon credits, the government under the power structure of VN will gain the most social welfare.

A Bi-Objective Fuzzy Credibilistic Chance-Constrained Programming Approach for the Hazardous Materials Road-Rail Multimodal Routing Problem under Uncertainty and Sustainability

Hazardous materials transportation involves extensive risk and cannot be avoided in practice. An advanced routing, however, can help to reduce the risk by planning the best transportation routes for hazardous materials that can make effective tradeoffs between the risk objective and the economic objective. In this study, we explore the hazardous materials routing problem in the road-rail multimodal transportation network with a hub-and-spoke structure, in which the risk is measured by the multiplication of population exposure and the associated volume of hazardous materials, and minimizing the total risk of all the transportation orders of hazardous materials is set as the risk objective. It is difficult to estimate the population exposure exactly during the routing decision-making process, which results in its uncertainty. In this study, we formulate the uncertain population exposure from a fuzzy programming perspective by using triangular fuzzy numbers. Moreover, the carbon dioxide emission constraint is formulated to realize the sustainable transportation of hazardous materials. To optimize the problem under the above framework, we first establish a bi-objective fuzzy mixed integer nonlinear programming model, and then develop a three-stage exact solution strategy that the combines fuzzy credibilistic chance constraint, linearization technique, and the normalized weighting method. Finally, a computational experiment is carried out to verify the feasibility of the proposed method in dealing with the problem. The experimental results indicate that tradeoffs between the two conflicting objectives can be effectively made by using the Pareto frontier to the hazardous materials routing problem. Furthermore, the credibility level and carbon dioxide emission cap significantly influence the hazardous materials routing optimization. Their effects on the optimization result are quantified by using sensitivity analysis, which can draw some useful insights to help decision makers to better organize the hazardous materials road-rail multimodal transportation under uncertainty and sustainability.

Carbon allowance allocation in the shipping industry under EEDI and non-EEDI

The CO2 emissions targets in this study are based on the Paris Agreement, which aims to cut emissions in 2050 to half of the 2005 levels, with a focus on the shipping industry. This study uses data for various kinds of vessels following the guidelines set in the Energy Efficiency Design Index (EEDI) and examines emission levels and the results of using different strategies during three different business climates. Carbon allowance allocations and cost benefit ratios (CBR) are included. The results show that the minimal free carbon allowances in 2050 for vessels in keeping with EEDI or non-EEDI scenarios should be set so that (1) under prosperous business cycles they are 29% and 14%; (2) under steady business cycles 83% and 42%; (3) under sluggish business cycles 510% and 255%, respectively. In addition, when shipping companies follow the emission cap guidelines, the CBR in 2050 for vessels in both scenarios will be (1) 37.52% and 47.45% during prosperous business cycles; (2) 43.49% and 45.65%during steady business cycles; (3) and 53.60% and 53.83% during sluggish business cycles, respectively. The results indicate that during prosperous business cycles, although the free carbon allowance for shipping companies will be greatly insufficient, their profits will still be higher than during sluggish business cycles.

Sustainability investments and production planning decisions based on environmental management

Europe 2020 strategy highlighted that sustainable consumption and production requires resource and energy efficiency. In terms of sustainability in energy, carbon footprint, conservation, efficient energy use, and emissions trading are some major concerns. Under the Kyoto Protocol, a trading market mechanism is developed as a policy of reducing the emissions of greenhouse gases in each country. Firms are always considering whether the investment cost on emission reduction matches the benefit. One possible practice is to look for energy savings that are able to offset additional costs from the sustainability investment. This paper aims to establish such a sustainability investment decision model, which uses dynamic programming for solutions to minimize cost. The purpose is to effectively reduce emissions produced during production through investment in energy-saving, high productivity equipment and allocation of production capacity considering emissions (or so-called carbon) trading market price, greenhouse gas emission credits or caps given by the government, inventory cost, and production cost. Management-oriented implications are proposed following analysis of the results of detailed numerical examples.

Building Climate Coalitions on Preferential Free Trade Agreements

In this paper we discuss the endogenous formation of climate coalitions in an issue-linkage regime. In particular, we propose a preferential free trade agreement on which a climate coalition should be built. The basic idea is that the gains of free trade can provide strong incentives for countries to join the coalition. As a framework, a multi-stage strategic trade model is employed in which each country may set an emission cap being effective on a permit market. In addition, a discriminatory import tariff may be imposed on dirty goods. However, at the heart of our approach is a preferential free trade arrangement among the members of a climate coalition leading to a favourable shift in the terms of trade. As a main result, trade liberalisation is found as an institution highly effective in building climate coalitions. In particular, the parametrical simulation of the model shows that participation in joint emission reduction is higher, consumption patterns are more environmentally friendly, and coalitional welfare is much more improved than in case of a single-issue environmental agreement.

Operational Decision Model with Carbon Cap Allocation and Carbon Trading Price

This paper considers a carbon emission cap and trade market, where the carbon emission cap for each entity (either government or firm) is allocated first and then the carbon trading price is decided interdependently in the carbon trading market among the non-cooperative entities which make their production decision. We assume that there are n entities emitting carbon during the production process. After allocating the carbon (emission) cap for each participating entity in the carbon cap and trade market, each participant makes a production decision using the Newsvendor model given carbon trading price determined in the carbon trading market and trades some amount of its carbon emission, if its carbon emission is below or above its own carbon cap. Here, the carbon trading price depends on how carbon caps over the entities are allocated, since the carbon trading price is determined through the carbon (emission) trading market, which considers total amount of carbon emission being equal to total carbon caps over entities and some fraction of total carbon emission should be from each entity participating in the carbon cap and trade market. Thus, we can see the interdependency among the production decision, carbon cap and carbon trading price. We model this as a non-cooperative Stackelberg game in which carbon cap for each entity is allocated in the first stage and each entity’s production quantity is decided in the second stage considering the carbon trading price determined in the carbon trading market. First, we show the monotonic property of the carbon trading price and each entity’s production over the carbon cap allocation. In addition, we show that there exists an optimality condition for the carbon cap allocation. Using this optimality condition, we provide various results for carbon cap and trade market.

China’s national carbon emissions trading scheme: lessons from the pilot emission trading schemes, academic literature, and known policy details

ABSTRACTUpon completion, China’s national emissions trading scheme (C-ETS) will be the largest carbon market in the world. Recent research has evaluated China’s seven pilot ETSs launched from 2013 on, and academic literature on design aspects of the C-ETS abounds. Yet little is known about the specific details of the upcoming C-ETS. This article combines currently understood details of China’s national carbon market with lessons learned in the pilot schemes as well as from the academic literature. Our review follows the taxonomy of Emissions Trading in Practice: A Handbook on Design and Implementation (Partnership for Market Readiness & International Carbon Action Partnership. (2016). Retrieved from www.worldbank.org): The 10 categories are: scope, cap, distribution of allowances, use of offsets, temporal flexibility, price predictability, compliance and oversight, stakeholder engagement and capacity building, linking, implementation and improvements.Key policy insightsAccurate emissions data is paramount for both design and implementation, and its availability dictates the scope of the C-ETS.The stakeholder consultative process is critical for effective design, and China is able to build on its extensive experience through the pilot ETSs.Current policies and positions on intensity targets and Clean Development Mechanism (CDM) credits constrain the market design of the C-ETS.Most critical is the nature of the cap. The currently discussed rate-based cap with ex post adjustment is risky. Instead, an absolute, mass-based emissions cap coupled with the conditional use of permits would allow China to maintain flexibility in the carbon market while ensuring a limit on CO2 emissions.

Electricity, the silver bullet for the deep decarbonisation of the energy system? Cost-effectiveness analysis for Portugal

The deep decarbonisation of the power sector coupled with electrification of end-use sectors will be crucial towards a carbon neutral economy, as required to achieve the Paris Agreement's goal. Several studies have highlighted the relevance of electrification under deep decarbonisation. However, previous work does not explore what would be the major shifts towards electrification, i.e., in what economic activities it will likely occur and when up to 2050 considering gradually stricter GHG emissions constraints. This is of upmost relevance since relatively small variations in emission caps may trigger substantial modifications in specific components of the energy system, namely the shift for the electrification of a particular energy end-use, with impacts on the power sector’s portfolio. In this paper, we analyse the extension of the electrification of the energy system as a cost-effective strategy for deep decarbonisation. We set a large number of increasingly stringent mitigation caps to assess: (i) the degree of electrification of different energy end-uses across all economic activities, (ii) the impact in power sector portfolio and costs and (iii) investment needs. The novelty of this paper relies on the anticipation of electrification of activities traditionally supplied by non-electricity energy carriers, by exploring when and how such transformation may occur in the future, and how much it would cost. We assess the case of Portugal till 2050 by using the TIMES_PT model to generate 50 increasingly stricter decarbonisation scenarios. In the long term, incremental changes (+1%) in more aggressive decarbonisation targets (beyond −70% reduction) induce substantial increase in the share of electrification growth rates. Electric private vehicles, electricity-based steam and heat production in ceramic industrial sector and heat pumps in buildings are the most cost-effective electric technologies. We found that a decarbonisation up to near −80% of 1990′s levels of the Portuguese energy system does not have a significant impact on the power sector unit costs, and does not surpass historic values for some years. However, it should be noted that incremental changes (+1%) in more aggressive decarbonisation targets may increase sharply electricity costs in 2050 (+9%). Thus, focusing in only few scenarios may narrow the role of electrification (or other mitigation options) and its associated costs for deep decarbonisation. This paper allows researchers, planners and decision makers to enhance awareness regarding the relevance and cost-effectiveness of electrification under decarbonisation, namely its feasibility and affordability, providing fruitful insights.

Optimal Joint Production and Emissions Reduction Strategies Considering Consumers’ Environmental Preferences: A Manufacturer’s Perspective

Carbon cap-and-trade mechanism is a government-mandated, market-based scheme to reduce emissions, which has a significant effect on manufacturers’ operation decisions. Based on the cap-and-trade mechanism, this paper studies the joint production and emission reduction problem of a manufacturer. The manufacturer faces emissions-sensitive demand impacted by consumers’ environmental preferences (CEP). An extended newsvendor model is used to find the optimal production quantity and emissions reduction quantity. We explore the impacts of market price of carbon credits, emission reduction investment coefficient and CEP on the optimal strategies. Numerical examples are provided to illustrate the theoretical results and orthogonal experimental design technique was applied to find robust system parameters. It is concluded that among all parameters, emissions cap has the greater impact on the expected profit, which is followed by than the market price of carbon credits. This means that the government plays a major role in economic development. The total carbon emissions are mainly affected by the carbon trading price and the product’s sale price, which indicates the carbon trading market and product market play a larger role in controlling environmental benefits. Several valuable managerial insights on helping governments and industries understand how market conditions change and make better long-term decisions are further concluded.

Strategic pollution control and capital tax competition

In an analytical model of symmetric countries with mobile capital and local or transboundary pollution we investigate whether competition in emissions taxes (or emissions caps) and capital taxes leads to efficient outcomes when governments act strategically. When they have capital taxes and emissions caps at their disposal, they refrain from taxing capital and set their caps inefficiently lax [efficient] for transboundary [local] pollution. When they have the option to tax capital and emissions, capital is subsidized [untaxed] and emissions taxes are inefficiently low [efficient] for transboundary [local] pollution. In case of transboundary pollution emissions caps are Pareto-superior to emissions taxes. That holds regardless of whether the environmental policy is applied as stand-alone policy or combined with capital tax competition.

Carbon Allowance Allocation in the Shipping Industry under Different Economic Activities

Abstract This study utilizes the Federal Fund Rate to identify three business cycles as prosperous, steady and sluggish. Then by combining the emission cap and the trade mechanism, proposes the models considering the different business cycles for the carbon allowance allocations problems (CAAP) in the shipping sector. For the CAAP, the critical issues for the decision maker is to decide a free carbon allowance level α to achieve the emission target of the Paris Agreement. The results show that the shipping freight rates in the prosperous business cycle are higher. And vessels with higher speed, the fuel costs of the total profit is higher. If comparing with the different business cycles, the proportion is higher in the sluggish business cycles. While if comparing with the different carbon trading price, the vessels with higher trading price the proportion of the emission costs of the total profit is higher. And if comparing with the different business cycles, the proportion of the shipping companies in the sluggish business cycles is higher. And for the carbon allowance allocation, in the prosperous business cycle because vessels emit more CO2, the shipping companies need to buy more carbon allowance; while in the sluggish business cycle the shipping companies can sell their allowances. Therefore, this study suggests that in the sluggish business cycles, shipping companies can save cost by reducing vessels speed.

Endogenous Emission Caps Always Induce a Green Paradox

Endogenous Emission Caps Always Induce a Green Paradox

A Coordinated Revenue-Sharing-Based Pricing Decision Model for Remanufactured Products in Carbon Cap and Trade Regulated Closed-Loop Supply Chain

The pricing strategy of remanufactured products has been widely regarded as a significant issue due to the associated economic benefits for both suppliers and retailers awareness worldwide. However, the overall profit determined based on centralized pricing strategy or decentralized pricing strategy is not in line with the actual profit of the manufacturer and the retailer, especially when taking the cost of carbon emission under the system of cap and trade into account. This paper proposes a revenue sharing contract model to coordinate the optimal pricing strategies for both manufacturers and retailers who engages in remanufacturing. The model considers the different Willingness to Pay (WTP) for remanufactured products, and profit distribution of manufacturers and retailers under the Cap and Trade policy. The optimal retail and wholesale price of new products and remanufactured products are derived by solving a convex programming model. Our results identify that: (1) The carbon emission cap is negatively correlated with the retail price of both new products and remanufactured products when the established profits function of the closed-loop supply chain is set to be a constant. The retail price of remanufactured products is also negatively correlated with the value of WTP, while the retail price of new products is positively correlated with WTP. (2) The profit of retailers is positively correlated with carbon emission cap, while the relation of the manufacturer's profit and carbon limit present an inverted U shape, which indicates the optimal carbon emission limit for manufacturers achieving the maximum profit. Moreover, the profit of the retailer and manufacturer and the coefficient of WTP is positively correlated. Numerical experiments are conducted to examine the feasibility of the proposed pricing strategies and gain optimal managerial insights for carbon cap and trade policy.

The impact of cap-and-trade mechanism and consumers’ environmental preferences on a retailer-led supply Chain

Governments and consumers are paying more attention to environmental protection. China, Korea, and several European countries have implemented market-based cap-and-trade systems to reduce carbon emissions. At the same time, consumers are willing to pay more for low-carbon products. The decisions of manufacturers and retailers may be impacted by these factors. This paper considers a scenario with a model economy under the effects of a cap-and-trade policy, with consumers who prefer low-carbon products, and develops an evolutionary game (EG) model to examine the evolution of behaviors for powerful retailers (such as Amazon, Gome, Walmart, etc.) and manufacturers in a retailer-led supply chain. In such a supply chain, the retailers can choose whether or not to promote low-carbon products and manufacturers can choose whether or not to reduce carbon emissions. A Stackelberg game structure is used to identify the optimal decisions for manufacturers and retailers. A model is developed to investigate the stability of the equilibrium solutions of the evolutionary game. System dynamics is used to simulate and analyze dynamic and transient behaviors, and is used to simulate the evolutionary game in a Chinese appliance industry. The simulation results show that the emissions cap, the market price of carbon credits, and the consumers’ preferences for low-carbon products are key factors influencing the retailers’ and manufacturers’ behavior. To increase long-term profits for both retailers and manufacturers, the retailers and the manufacturers should make sustainable decisions in tandem.

Pricing Decisions of CSR Closed-Loop Supply Chains with Carbon Emission Constraints

Global warming has become a growing concern for countries around the world. Currently, the direct way to solve this issue is to curb carbon emissions. Governments and enterprises should assume the social responsibility to conserve the environment. Under the background of carbon emission constraint, this article investigates the optimal decisions of closed-loop supply chains in the context of social responsibility, explores the impacts of constraints of carbon emissions and corporate social responsibility on recycling and remanufacturing decisions, and introduces the model of maximizing social welfare for further comparison and analysis. The results show that the coefficient of remanufacturing and emission reduction and the coefficient of government reward and punishment are inversely proportional to recycling rates and the total carbon emissions. Governments should formulate rational carbon emission caps for enterprises with different coefficients of remanufacturing and emission reduction. Additionally, corporate social responsibility has a positive effect on recycling rates, and a rise in its strength can lead to a fall in carbon emissions per unit product. In terms of product recycling and profit sources, the model of maximizing social welfare is superior to that of maximizing the manufacturer’s total profits, which provides new managerial insights for decision-makers.

Evidence of increased electricity influx following the regional greenhouse gas initiative

This paper presents evidence that electricity influx to the U.S. Northeast increased after the introduction of the Regional Greenhouse Gas Initiative (RGGI), a carbon emissions abatement program. Electricity markets allow emissions reductions achieved in the region to be offset by increased emissions in other electricity-producing regions, as local generation is replaced with electricity imports. The empirical analysis is conducted using the synthetic control method. Results indicate that imports increased after RGGI's establishment in 2009—in which the increase predominantly occurred after the emission cap was reduced in 2014—which suggests that electricity production and carbon emissions increased outside RGGI.

Exploring the macroeconomic fluctuations under different environmental policies in China: A DSGE approach

Due to the uncertain effects on economic growth and economic fluctuations caused by environmental policies, the best means of choosing the most appropriate environmental policy remains controversial. In the face of various uncertain economic factors, economic fluctuation is an important criterion for evaluating different environmental policies. Thus, we established an environmental dynamic stochastic general equilibrium model under New Keynesian framework embodying nominal price rigidities, environmental policies, pollutant emissions and real uncertainties with the aim of comparing the impacts of different environmental policies on the macroeconomic fluctuations. The results are as follows. First, the responses indicate that all kinds of environmental policies are counter-cyclical. Emissions intensity policy has the strongest effect on curbing fluctuations. Second, a positive energy efficiency shock will lead to a corresponding increase in energy inputs, which is referred to as the energy rebound effect, as well as a rise in pollutant emissions. Third, an emissions intensity shock will exert greater impacts than environmental tax rate shock and emissions cap shock. Fourth, the lower is the price dispersion the less intermediate goods are needed, and, consequently, the lower are the pollutant emissions. Taken together, the results highlight the policy implications associated with choosing an environmental policy.