EU Emissions Trading Research Articles

Interactions and distortions of different support policies for green hydrogen

This paper explores various policies to support climate-neutral hydrogen production, focusing on their interaction with energy markets and cap-and-trade systems such as the EU emission trading scheme. We develop and deploy a state-of-the-art equilibrium model to examine the effect of hydrogen support policies on the interactions between hydrogen, electricity and emission markets. Our analysis shows that mechanisms remunerating hydrogen production can distort spot prices of electricity and hydrogen more strongly than mechanisms that remunerate hydrogen production capacity. Hydrogen support mechanisms furthermore promote renewable electricity production and deter investment in conventional generation assets. The associated decrease in emissions in the power sector leads to an increase of emissions in the industrial and hydrogen sector due to the waterbed effect in the EU emission trading scheme. Our case study on an emission-capped area inspired by the EU shows that the operational distortions that production-based mechanisms exhibit, typically increase costs more than the investment distortions that capacity-based mechanisms entail.

Carbon Giants: Exploring the Top 100 Industrial CO2 Emitters in the EU

We analyze emissions and associated damages from the top 100 industrial CO2 emitters in the EU using data from the European Pollutant Release and Transfer Register, the EU Transaction Log, population grids, and regional information. These top emitters account for 19% of total EU CO2 emissions, 39% of industrial CO2 emissions, as well as a third of industrial SOx and NOx emissions, and a significant share of industrial PM10 emissions. In 2017, monetized damages of hazardous co-pollutants range from 20 to 67 billion Euros, and combined co-pollutant and climate damages amount to between 92 and 260 billion Euros. The top 100 alone would exhaust the EU’s carbon budget in a few decades. The joint climate and co-pollutant damages of a significant number of the top 100 exceed the economic value generated by the entire industry sector in their respective regions, indicating substantial underregulation. Yet the top 100 received free EU Emissions Trading System permits for 27% of their carbon emissions. Many top emitters are located in densely populated regions, with 3.1% of EU’s population living within 10 kilometers of a Carbon Giant. Our analysis reveals the critical importance of addressing major emitters in research and policymaking.

Pollution Permits and Financing Costs

AbstractEffective environmental policy should consider how the financiers of polluting firms behave. We study phase III of the EU Emission Trading System. Loan spreads for cap‐and‐trade participants are a function of compliance costs, permit market features, and firms’ strategic actions. In contrast with the program intentions, we find that loan spreads fall by approximately 25%. We show that this decrease is almost entirely driven by low permit prices, the firms’ proactiveness to store permits, and imperfect foresight of market conditions in phase III. The drop in spreads cannot be explained by the decline in energy prices and/or other confounding factors.

The EU Emission Trading System Tax Regime and the Issue of Unfair Maritime Competition

The EU Emission Trading System Tax Regime and the Issue of Unfair Maritime Competition

Dissecting environmental efficiency: The role of technology adoption and usage

How could firms best reduce their environmental impact? Should they change technology? Or could they do better with what they already have? This paper shows that one size does not fit all. We analyse a sample of polluting production plants (i.e. installations) regulated under the EU Emission Trading System. We employ a mixture model estimation to dissect environmental efficiency into a technology adoption component (what type of technology is used) and a technology usage component (how a technology is used). Our installation-level analysis shows that the share of installations adopting frontier technologies is about 21%. We also find that the average environmental efficiency gains that installations could reach by improving technology adoption and technology usage are 75% and 80% respectively. The analysis of balance-sheet data on parent companies reveals that better environmental technologies are adopted by larger, listed, multi-installation and international companies, while older firms and firms with higher intangible assets intensity more commonly show improved technology usage.

Assessing the influence of actual LNG emission factors within the EU emissions trading system

The shipping sector has been incorporated into the European Union Emissions Trading System (EU-ETS). Undoubtedly, the carbon emission factor is a critical consideration when determining carbon allowances in the EU-ETS, known as EU Allowances (EUAs). In this study, an all-performance carbon emission test was conducted on a marine LNG engine to investigate the differences between the actual carbon emission factor and the reference value. It was observed that the actual carbon emission factor is smaller than the reference value. The test results indicate a discrepancy of approximately 3%, resulting in potential savings of 10,000 to 20,000 dollars in EUAs for a ship consuming 2000 tonnes of LNG fuel annually. Furthermore, variations in the carbon emission factor were observed under different engine operational conditions, fluctuating by around 2% at constant revolutions per minute (RPM). This suggests the need for more suitable emission testing methods to accurately reflect actual emissions and better achieve emission control goals.

Can't see the carbon for the CO2? Regulating CCU value chains under and beyond climate law

AbstractTo realise the objectives of the European Green Deal (EGD), fossil carbon will have to be not only reduced but also replaced with recycled carbon. The European Commission considers industrial carbon management and carbon capture and utilisation (CCU) technologies to be part of the solution. A value chain ensues when carbon dioxide (CO2) is captured and utilised as raw material. Examination of the climate, energy and environmental legal landscape of one specific CCU value chain—comprising of waste, waste incineration and plastic raw material—reveals the varied approaches regulation has towards CO2 and carbon. In this article, both carbon cycle legislation and legislation on the carbon source and the material storing carbon are analysed. The legislation being developed directly for CCU for products (other than synthetic fuels) focusses on the carbon cycle and CO2 under the EU emissions trading system (ETS) and a proposed Carbon Removal Certification Framework. Regulatory uncertainty remains for the studied CCU value chain as the capture of CO2 from waste incineration has yet to be incentivised under the EU ETS. Further, the criteria for the permanence of carbon storage in products to qualify under the EU ETS and of the long‐term storage under the Carbon Removal Certification Framework (CRCF) have yet to be developed. For a more complete understanding, we have also analysed waste and product regulations. The conceptual structure of the EU Waste Framework Directive does not seem to support circulating carbon. This context also raises the fundamental question of whether the purpose of waste incineration could be carbon recycling instead of mere energy production. Regarding material storing carbon, plastics, the regulator has been silent as CCU‐originated plastic raw material is not recognised in EU plastics law. These issues must be identified and resolved one by one before the EGD can be secured; revisiting only climate law instruments does not suffice.

Towards Sustainable Strategies: Uncovering the Impact of Environmental Policies on Innovation Activities of Czech Firms

In recent years, there has been an increased emphasis on sustainable development worldwide, which has prompted governments to adopt environmental policies aimed at mitigating the adverse environmental impacts of economic activities. Among these strategies, the implementation of environmental policies has emerged as a key tool for promoting sustainable development. However, although these policies are created with good intentions, their impact on firms' innovation activities remains a matter of debate and research. The aim of this paper is to examine the impact of environmental policies on the innovation activities of Czech firms, with a particular focus on how these policies shape firms' strategies towards sustainable development. Given the growing emphasis on sustainability and environmental issues, it is necessary to examine how environmental policies can influence firms' overall innovation activities. 412 firms of different sizes were surveyed. And EU emissions trading and energy consumption emerged as the most influential variables with a positive impact.

Carbon market design and market sentiment

Concerns about systematic price distortions in the EU Emission Trading System (ETS) have risen in recent years. This paper shows how carbon-market design affects the impact of market sentiment, i.e. systematic deviations of price expectations from fundamentals by at least some market participants, on equilibrium prices. The Market Stability Reserve (MSR) of the EU ETS that adjusts supply based on past allowance banking undermines self-stabilization of the carbon market by discouraging rational intertemporal arbitrage. The MSR increases vulnerability of the EU ETS to market sentiments. Initially, the allowance price responds more to distorted expectations while the MSR (partially) prevents the distortion to spread across periods. Making the MSR more responsive to banking decisions increases the likelihood that distorted expectations turn out to be correct ex post. In contrast, a mechanism that adjust the cap based on the current allowance price does not face a trade off between stabilizing prices in the present and the future.

Does Speculation Matter in the Carbon Pricing Framework? Insights from the EU Emissions Trading System

To align with the global goal of keeping temperature below [Formula: see text]C, a market-based initiative, “Emissions Trading System” (ETS), has been developed to mitigate climate change. However, while the carbon allowances traded at the ETS are mostly held and traded by polluting companies, financial actors engage in “speculation”, activities that might be detrimental to the functioning of the ETS have also invested in the ETS. By drawing from the big data archive of Google Trends, we construct a news-based speculation index to proxy for the role of speculation in the dynamics of carbon pricing. Given our preliminary finding of inherent volatility and the mixed-frequency nature of the dataset, we employ the GARCH-MIDAS econometric technique to test the hypothesis that an all-inclusive framework that reflects the emission compliance and emissions non-compliance dynamics of the ETS is the most accurate approach to modeling carbon prices. We show that higher speculation in the ETS fosters higher long-term volatility in carbon prices, that speculation is a good predictor of carbon prices, and that its positive impact on carbon price returns makes the ETS an attractive investment opportunity. We provide a data-driven framework upon which the growing debate about whether the behavior of the non-compliance emission actors in the ETS endangers or benefits the functioning of the ETS can be evaluated empirically.

Does compensating firms for indirect carbon costs work? Evidence from Finnish manufacturing

The EU ETS indirect cost compensation subsidy was given out in the 2010s to compensate firms for increased electricity costs caused by the EU Emission Trading System, with the aim to support the competitiveness of producers in the EU. This paper studies the effects of the compensation subsidy on firm performance empirically with production plant level data from Finland. There is no clear evidence that the electricity costs have in fact been higher during the subsidy period, and the way that the subsidy was designed was not efficient. Perhaps for these reasons, the results find no indication of improved firm performance for the subsidy recipients.

EU Emissions Trading for Transport and Buildings: Saved by Synergistic Institutional Interaction?

EU Emissions Trading for Transport and Buildings: Saved by Synergistic Institutional Interaction?

Das Energieeffizienzgesetz –überflüssig, marktwidrig und schädlich?

Abstract With the German Energy Efficiency Act, politicians are intervening directly in business activities by imposing energy-saving requirements. The act sets precise targets for future energy consumption in Germany as a whole and obliges companies above a certain energy consumption level to set up energy management systems or to draw up implementation plans for energy-saving measures identified as economically viable. Government bodies have an annual obligation to save energy; this is unnecessary, as the relevant signals for energy savings result from EU emissions trading. It is also dysfunctional, as it undermines entrepreneurial freedom of action and leads to a de facto planned climate economy.

Carbon Leakage Concept after Carbon Pricing & Green Deal Policies

As part of the European Green Deal, EU nations are required to decrease their carbon emissions by 55% by 2030 and reach carbon neutrality by 2050. The EU's emissions trading system is the cornerstone of this goal. In theory, rising carbon prices may cause carbon leakage, or the transfer of economic activity and related emissions from high-carbon economies to low-carbon economies. Losing market share to rivals in international rivalry might result in short-term international carbon leakage. In the long term, it can be accomplished by moving domestic businesses abroad. To date, a variety of tools, including offsets and free allowances granted under the ETS, have been used to support the carbon leakage risk of high-risk industries. This paper develops an international technique, the EU Emissions Trading Scheme (ETS) Phase IV consultation, to produce a sector-level risk assessment of carbon leakage in Türkiye. This methodology combines emissions intensity and trading intensity, two important indicators for assessing carbon leakage risk. Although the former is commonly employed as a measure of a company's exposure to carbon costs, the latter indicates its ability to pass on costs to customers without losing market share. According to the carbon risk study carried out in Türkiye for the aluminium, cement, paper, fertilizer, iron-steel, and ceramics sectors, cement has the highest risk, while paper carries the lowest risk

Has the EU Emissions Trading System Worked Properly?

Has the EU Emissions Trading System Worked Properly?

Facilitating a Sustainable Aviation Fuel Transition in Italy

Civil aviation significantly contributes to “hard-to-abate” emissions, responsible for 2% of global CO2 emissions. This paper examines the most effective policies to promote Sustainable Aviation Fuels (SAFs) in Italy, using a multi-level policy analysis and a stakeholder-based case study approach. The policies reviewed comprise the international, European, and national level. The paper analyses at the international level, ICAO CORSIA and, at the European level, the Renewable Energy Directive (RED), ReFuel EU, and the EU Emissions Trading System (EU ETS) for aviation. Italy has not yet implemented specific policies targeting SAF transition, which is challenging due to commercialization issues and policy inconsistencies. These include the price gap between SAF and conventional fuels, different definitions adopted, and environmental objectives pursued with respect to sustainable fuels by ICAO and the EU. Other challenges include double-counting risks and fuel tankering practices. This article contributes to Italy’s SAF policymaking by developing a stakeholder-based quantitative survey, whose results suggest that three measures are key: tax subsidies for technology and infrastructure users, tax credits for upgrading production infrastructure, and tax breaks for SAF-using companies, fuel handlers, and distributors.

Leadership in EU policy-making: a deep dive into the extension of the EU emissions trading system

ABSTRACT This article offers insights into how leadership can be provided to advance the EU policy-making process through a case study of the policy-making for the new EU emissions trading system for buildings, road transport and additional sectors (ETS-2). Conceptually, it contributes to the literature on leadership in the EU by developing a three-part framework for observing leadership in EU policy-making, focussing on the intentions of an actor, the effects of the actions of an actor and the perceptions of other actors. The article also contributes to the literature on interactions between leaders in EU policy-making. Empirically, we provide a process tracing analysis of leadership in the policy-making process for the ETS-2. Using our framework, we examine five key leadership moments, showing how Denmark provided cognitive leadership, Germany provided exemplary and structural leadership, and the Commission and rotating Presidencies provided cognitive and entrepreneurial leadership. Our empirical analysis shows that various types of leadership were partially simultaneously and partially consecutively provided, with some leaders following up on the leadership strategies of others. We term this dynamic ‘sequential leadership’. Our finding confirms the importance of seeing leadership as a relationship, not just between leaders and followers, but also amongst leaders.

Regulatory compliance and operational efficiency in maritime transport: Strategies and insights

In recent years, with increasing maritime trade, the shipping industry has faced the challenge of mitigating escalating greenhouse gas emissions. This study investigates the cost mitigation strategies of shipping companies in response to three key regulations: the Carbon Intensity Indicator, the EU Emissions Trading System, and the FuelEU Maritime regulation. By proposing optimal speeds for container ships on the Asia–Europe route and examining the potential for carbon leakage, the study aims to predict strategies of shipping companies and derive insights for achieving sustainable regulatory compliance. The results provide a comprehensive analysis of the regulations' impact on operational costs and emissions, with the robustness of the findings confirmed through extensive sensitivity analyses. The discussion highlights the unintended consequences of current regulations that may deviate from the ultimate objectives of reducing GHG emissions and achieving sustainable maritime transport. Ultimately, the study seeks to support the development of effective maritime regulations that align with the operational strategies of shipping companies, emphasizing the need for a holistic approach to achieve the intended outcomes of environmental policies.

Policy credibility is a key component for an effective and efficient EU Emissions Trading System

Policy credibility is a key component for an effective and efficient EU Emissions Trading System

EU carbon prices signal high policy credibility and farsighted actors

AbstractCarbon prices in the EU emissions trading system are a key instrument driving Europe’s decarbonization. Between 2017 and 2021, they surged tenfold, exceeding €80 tCO2−1 and reshaping investment decisions across the electricity and industry sectors. What has driven this increase is an open question. While it coincided with two significant reforms tightening the cap (‘MSR reform’ and ‘Fit for 55’), we argue that a reduced supply of allowances alone cannot fully explain the price rise. A further crucial aspect is that actors must have become more farsighted as the reform signalled policymakers’ credible long-term commitment to climate targets. This is consistent with model results that show historic prices can be better explained with myopic actors, whereas explaining prices after the reforms requires actors to be farsighted. To underline the role of credibility, we test what would happen if a crisis undermines policy credibility such that actors become myopic again, demonstrating that carbon prices could plummet and endanger the energy transition.