EU ETS Research Articles

Empirical analysis of the effectiveness and liquidity of the European carbon emission rights futures market

Global warming from greenhouse gas emissions is a worldwide concern and the European Emissions Trading System (EU ETS) is the largest market in the world and has a model role. Some researchers have argued that the carbon emissions futures market was not weakly effective at the beginning of its establishment, but there is a lack of sufficient research on the effectiveness of the market in recent years. Therefore, this study analyses market effectiveness and liquidity by using positions, trading volumes and settlement prices for carbon futures from 2 January 2014 to 23 November 2022, and calculates log returns from settlement prices to construct an ARIMA model for verifying the market efficiency. The analysis finds that the carbon futures market satisfies weak form validity and that the market's macro liquidity and micro liquidity are gradually increasing, and the ARIMA model finds that there is a large seasonality factor in the market. This is mainly related to the maturity of the market, the improvement of the trading mechanism and the global consensus, providing constructive reference for the improvement of the carbon emission rights futures trading market and trading mechanism in China.

Dynamic time-frequency connectedness between European emissions trading system and sustainability markets

This paper examines the time-frequency spillovers and connectedness network between European ETS and the sustainability markets. Empirically, we rely on the Baruník and Křehlík (2018) Diebold and Yilmaz (2012) spillover index to measure the time-varying spillovers, directional spillover, net directional spillover and connectedness network in the short-term and long-term investment horizons. Our findings suggest higher overall interconnectedness between the carbon price returns and sustainability indices, with a total spillover index of 69.75%. More specifically, the magnitude of spillovers is substantially higher in the short term than in the long terms. Moreover, European, France, and Germany sustainability indices exhibit the properties of the largest transmitter of spillover of returns towards the system whereas carbon prices are the lowest contributor to transmitting the spillovers towards the system. In the connectedness network, ETS offers a good investment opportunity with Belgium and Finland sustainability indices due to the lower level of returns connectedness. Finally, ETS provides the portfolio risk reduction in the short-term and long-term investment horizons.

Testing for causality between climate policies and carbon emissions reduction

In this paper, we evaluate the causal effects of climate policies on carbon emissions reduction. Specifically, we investigate the properties of the Granger causality test in the frequency domain, assuming that the dependent variables include a binary variable and a continuous variable (resp. treatment and outcome variables). Monte Carlo simulations confirm that: (i) this test is valid under this assumption; and (ii) it has more power than its time-domain counterpart. Then, using Sweden as a case study, we evaluate the impact of the Kyoto Protocol, the Swedish carbon tax, and the European Union Emissions Trading System (EU ETS) on carbon emissions reduction over the period 1964–2021. Our empirical results indicate that only the carbon tax Granger causes carbon emissions reduction in the long run. Our methodological framework offers policymakers a useful toolbox for climate policy evaluation as well as new insights into the outcomes of international treaties and carbon pricing policies.

The EU emissions trading system and airline low-carbon transition: A game-theoretic approach

Aviation is among one of the fastest-growing sources of greenhouse gas emissions (GHG). Thus, transitioning into a more low-carbon approach for future sustainable growth in the airline industry is necessary. Inspired by European Union's GHG emissions trading system that allows automobile makers to “pool” their carbon emissions, we study three emission pooling scenarios for the airline industry. Under the EU emissions trading system (EU ETS), passenger and cargo airlines such as Lufthansa and FedEx can either (1) pay a premium for each ton of carbon dioxide equivalent (CO2eq) they fall short of free allowances (Pay Premium Strategy) or (2) buy allowances from other industries in the EU ETS market (Market-Based Strategy) (3) partnership with other airlines to “pool” their carbon emissions (Cooperative Strategy). These three approaches correspond to different market structures. The latest strategy has a co-opetition relationship between airlines: traditional airlines operating older aircraft purchase emission allowances from airlines operating newer aircraft. The purpose of this paper is to examine the conditions for airlines' paying penalties, purchasing allowances from the ETS market, or cooperation. We demonstrate that the EU ETS will always be detrimental to airlines using older aircraft. A hefty premium may effectively induce airlines to pursue a low-carbon transition plan. Our study shows that the ETS is not a silver bullet; it only works when the premium mechanism is designed properly and a fair market for emission allowances is available.

Drivers and pass-through of the EU ETS price: Evidence from the power sector

Despite low and volatile allowance prices observed between 2008 and 2018 within the European Union (EU) Emission Trading System (ETS), power generators’ responses were by and large consistent with predictions of economic theory. We infer this in a number of steps. First by establishing that the qualitative response of the EU ETS allowance price to variations in the pre-eminent drivers of short-term fuel-switching, both the gas and coal price, is as economic theory prescribes. Second, we decompose allowance price returns and impute that allowance banking had value in helping generators smooth compliance costs. Third, we show that pass-through of allowance costs was (more than) complete in seven major European markets for both coal- and gas- fired power generation. Our inference on pass-through is novel in that we impute allowance cost pass-through by dispatch technology even when the merit-order curve is unobserved. Put together, our findings imply that even prior to the recent reform-induced price appreciation, the EU ETS was more functional than many observers recognized.

Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market

I examine the Coasean independence property in a large multinational cap-and-trade scheme for greenhouse gas emissions, the EU Emissions Trading System. I analyze whether emissions of power producers are independent from allowance allocations by leveraging a change in allocation policy for a difference-in-difference strategy. The evidence suggests that the independence property holds overall and for larger emitters and that firms respond to the loss in allocation by increasing allowance purchases. Suggestive evidence for small emitters indicates that trading costs or behavioral bias distorts their emission decisions. However, their small emission share leaves the independence property intact at the sector level. (JEL L94, L98, Q48, Q51, Q54, Q58)

Introduction to the EU Emissions Trading System and the Development of Carbon Trading in Taiwan

Introduction to the EU Emissions Trading System and the Development of Carbon Trading in Taiwan

European Union Policy on Climate Change Framework

The aim of the paper is to study the European policies in the matter of climate change and water resources management, especially Common Agricultural Policy, Environmental Policy, EU Emission Trading System (ETS), climate and energy policies nexus with international agreements in climate action and world global warming, and the way these European policies are settled and applied in national countries. The paper studies the manner these policies are implemented in European Union countries, funding resources for climate action, with impact on decisionmaking level and good-governance.

Finally, it seems to be working – the evolving valuation effect of the European Union’s emissions trading system

This research examines the market reaction to the publication of firm-specific environmental news for participating firms in the European Union’s Emissions Trading System (EU ETS) during its third phase. Our sample of 123 publicly listed participating firms, located in 21 European countries, accounted for 45.43% of emissions in the EU ETS in 2020. Using an event study methodology during the period 2014–2021, we find that positive news was rewarded with increased returns for publication events related to the latter years of the phase (2017–2020) while it had an insignificant impact for earlier year (2013–2016). This indicates that the EU ETS is finally fulfilling its intended function of incentivising participating firms to reduce their emissions. Our study highlights the contextually contingent nature of the relationship between environmental and financial performance.

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.

Carbon pricing and emissions: Causal effects of Britain's carbon tax

This study estimates that the introduction of a carbon tax in the British power sector in 2013 and its two subsequent elevations in 2014 and 2015 led to a substantial decline in electricity-related CO2 emissions by 26% (or 38.6 MtCO2) within only three years. Identification of the causal effect relies on discontinuities in electricity generation induced by the policy changes and on a novel and detailed dataset of hourly emissions from all British fossil-fuel power stations. Notably, the carbon tax changed power plants' marginal costs according to their emission intensity, so that “dirty” coal was pushed out of the market, whereas “cleaner” gas filled a large share of the production gap. Our findings suggest that even a moderate carbon tax can induce significant abatement, supporting the notion that a market-based climate policy should be viewed as a viable policy option. We also discuss limitations of this national tax, such as that it likely created emissions abroad via imports and the waterbed effect within the EU Emission Trading System.

Third Time’s a Charm? Assessing the Impact of the Third Phase of the EU ETS on CO2 Emissions and Performance

The EU Emissions Trading System (ETS) is the largest cap-and-trade scheme for CO2 emissions globally. This study evaluates the impact on CO2-equivalents emission of the increased stringency of Phase 3, which marked a significant shift from the previous phases of the EU ETS and significantly reduced the number of emissions permits (EU Allowances—EUA) freely allocated. Our analysis reveals that the increase of purchased EUA had a statistically significant, substantial impact on emissions reduction from Phase 2 to Phase 3, with a decrease in emissions of approximately half a ton for each additional allowance bought. Our (conservative) estimate of the total reduction in emission is 422 MtCO2-eq, 22.5% of the average yearly EU ETS emissions or 4.3–3.0% of emissions in Phases 2 and 3, respectively. Under Article 10c of the ETS directive, lower-income Member States have been allowed to continue the free allocation of EUA to electricity-generating installations during Phase 3 to provide more time and resources for modernization. We show that such derogation had a sizeable and significant detrimental impact on the achievement of emission reduction targets, leading to an increase in emissions of about half a ton for each additional allowance bought; a result that highlights the need for increased efforts on support measures (e.g., the Modernization Fund). We also investigate the impact of the EU ETS on output, capital productivity, and labour productivity. Our analysis indicates that the performances were not negatively impacted by the tightening in regulation that occurred between Phases 2 and 3. We also find no evidence that the derogation status impacted performances, which further ameliorates the concerns about the potential intra-EU competitive distortions induced by the regulation. Our results cast a favourable light on the reduction of the free allocation of EUA and the tightening of the regulation implemented in Phase 4 of the EU ETS.

Environmental and Accounting Regulation: Lessons from The EU ETS

Environmental regulation potentially has a relevant role in reducing the negative effects of the firms’ economic activities on the environment and thus in improving firms’ environmental performance. However, environmental regulation can impose binding reduction targets of pollution, which can negatively affect firms' financial performance. Additionally, the institutional framework of the environmental regulation potentially affects the representation of firms’ environmental perfomance in their financial statements. Against this background, the purpose of this paper is two-fold. First, it aims to investigate the effectiveness of the European Union Emissions Trading Scheme (EU ETS) in promoting companies’ environmental and financial performance. Second, it aims to investigate how EU ETS affects the representation of environmental performance inside firms’ financial statements. To reach our aim, we follow two main stages of analysis. First, with descriptive statistics and archival data analysis, we investigate the effects of the EU ETS institutional framework on firms’ environmental and financial performance. Secondly, we develop a comparative analysis of the IAS/IFRS and Italian accounting standards concerning the recording of emission allowances. Our findings show that the EU ETS is a flexible regulation, which is effective at improving firms’ environmental performance and at safeguarding firms’ financial performance. Additionally, we find that under IAS/IFRS and Italian accounting standards, the environmental performance is included in the financial statements by recognizing the cost for polluting on an accrual basis.

Tax, kill or bill: An analysis of unilateral CO2 price floor options in multilateral emissions trading systems

As more governments consider minimum domestic CO2 prices, we investigate three unilateral options for jurisdictions operating within a multilateral emissions trading system (ETS): 1) an additional CO2TAX; 2) an auction reserve policy to KILL (invalidate) allowances; and 3) an overcompliance requirement to BILL domestic emitters for extra allowances per ton of emissions. We assess three main economic incentives for unilateral action: environmental benefits, fiscal benefits, and terms-of-trade gains. We derive theoretically optimal unilateral price floors and, based on numerical simulations for the EU ETS, illustrate how a national government's preferred strategy depends on how it values fiscal versus environmental benefits.

The prospects for, and implications of, emissions trading in shipping

The decarbonisation of shipping has become a high priority on the environmental and political agenda. The prospect of implementing an Emissions Trading System (ETS) for shipping has come to prominence as a proposed mechanism for speeding up the decarbonisation of the industry, with the EU taking proactive action to include shipping within the EU ETS by 2023. This paper analyses and provides a qualitative review of the historical development of the discussions and actions taken at both global level (by the International Maritime Organization (IMO)) and at regional level within the EU. A SWOT analysis of the potential implementation of an ETS for shipping is then presented. The paper concludes that an ETS for shipping can incentivise greater investment in, and deployment of, green technologies that will have the effect of reducing the carbon footprint of the shipping industry. However, the speed and significance of this effect will depend upon the specific shipping market segment and the relative stage in shipping market cycles over time. It is further concluded that despite the imminent unilateral introduction of shipping into the EU ETS, it is important that the IMO continues its work to develop a global ETS that promotes a ‘level playing field’ for competition within the sector and eliminates the risk of carbon leakage.

Multi-step carbon price forecasting using a hybrid model based on multivariate decomposition strategy and deep learning algorithms

Accurate prediction of carbon price effectively ensures the stability of the carbon trading market and reduces carbon emissions. However, making accurate prediction is challenging because the carbon price is highly nonlinear and nonstationary due to complex influential factors. Thus, we propose a multifactorial hybrid forecasting framework, ET-MVMD-LSTM, to integrate three advanced algorithms for a reliable multi-step ahead prediction of the carbon price. First, extremely randomized tree (ET) is used to determine the optimal input variables for the modeling to follow. Then, multivariate variational mode decomposition (MVMD) is executed to simultaneously decompose the screened input variables into relatively regular sub-modes, which reflect characteristics at different scales. Subsequently, long short-term memory (LSTM) with a stable forecasting ability is employed to model each mode individually to effectively extract the long-term trend and short-term fluctuation features. The final forecast is reconstructed by the ensemble of the predictions of all sub-modes. Last, systematical studies on two European Union Emissions Trading Scheme carbon price datasets indicate that the proposed ET-MVMD-LSTM framework outperforms several advanced baseline models in terms of accuracy and stability, which prove the framework is deemed promising and practical for carbon price prediction.

Research on Day-Ahead Optimal Scheduling Considering Carbon Emission Allowance and Carbon Trading

In the context of the marketization of carbon trading in the power system, it is of great theoretical and practical significance to study a scientific and effective carbon emission quota allocation strategy. To solve this problem, under the current situation of large-scale access to new energy, considering the limitations of the carbon emissions from different emission subjects plus the construction of a carbon trading model among the emission subjects, a day-ahead optimal scheduling method that takes carbon emission quotas and carbon trading into account is proposed. Firstly, carbon transaction cost models of thermal power and wind power are constructed, respectively, and a carbon emission quota allocation strategy based on the entropy method is proposed to redistribute the weights of baseline emission factors for the regional power grid. Then, considering the additional carbon emissions of conventional thermal power units caused by wind power access, the carbon trading costs of different types of generation units are calculated on the basis of carbon trading price prediction. Thereafter, a day-ahead optimal scheduling model considering carbon emissions trading is constructed with the objective of minimizing the total cost of the system in the scheduling period. The model is solved as an MINLP problem based on MATLAB 2016a software utilizing CPLEX 12.4. Simulation results verify the correctness and effectiveness of the proposed method.

Speed and Fuel Ratio Optimization for a Dual-Fuel Ship to Minimize Its Carbon Emissions and Cost

In this study, nondominated sorting genetic algorithm II (NSGA-II) was used to minimize the cost and carbon emissions of a liquefied natural gas (LNG) dual-fuel ship for a given route. This study considered the regulations of emission control areas (ECA) and the European Union (EU) Emissions Trading System (ETS) to determine the optimal speed and LNG/oil ratio for the ship. NSGA-II used the arrival time at each port and the LNG usage ratio for each voyage leg as its genes. The time window for arrival, the fuel cost, and potential EU carbon emission regulations were used to estimate the cost of the considered voyage. Moreover, fuel consumption was determined using historical data that were divided by period, machinery, and voyage leg. The results indicated that the optimal speed and fuel ratio could be determined under any given fuel and carbon price profile by using NSGA-II. Finally, the effects of regulations and carbon price differences on the optimal speed and fuel ratio were investigated. The cost minimization solution was susceptible to being affected by the regulations of ECAs and the EU ETS. The speed profile of the cost minimization solution was found to have a tendency to travel at faster-than-average speeds outside ECAs and non-EU regions, and travel slower in ECAs and EU regions. Meanwhile, the selection of fuel type showed that 100% traditional fuel oil in all regions, but with sufficiently high EU carbon permit cost, tends to use 100% LNG in EU regions.

Flue gas condensation of solid fuel fired heating plant

In the Czech Republic, increasing trend exists in utilization of biomass as a fuel in heating and power plants. This is preferred solution by EU Climate plans, and it is connected with some economic benefits (e.g. green bonuses, guaranteed purchase price), on the other hand the combustion of fossil fuels is penalized (EU ETS – Emission Trading System). There are many types of biomass with different parameters but one of the most discussed are wooden resides because of its quantity. There are big differences between quality parameters, especially in moisture content, which is decreasing the LHV. There are some technologies which can decrease moisture. Dryer technologies could be simple so-lution, but final decreasing of moisture is quite low. More effective is application of flue gas condensation. This technology is well known for gas-fired boilers but nowa-days is still more often build by new solid fuels-fired plants. This deals with design of condensation technology for existing heating plant in Mladá Boleslav. The fuel mixture is based on wood residues (70 %) and pelletized plant biomass (30 %). The calculation was done for three boilers for soild fuels – two same CFBs (steam production 100 t·h-1) and one BFB (steam production 80 t·h-1). Moisture content was calculated for two cases of wooden residues with moisture content 35 and 50 %. System of condensation include three step water scrubber, heat ex-changer, heat pump and humidifier of combustion air. The final designed output of unit for BFB is 12.7 MW (19 MW for each CFBs), but from these the output of heat pump is 5 MW (7.5 MW). The source of heat for heating pumps is steam, which can be used in current heater, so the final net output from condensation is 7.7 MW (11.5 MW). These parameters are only for 50 % of moisture content in wooden residues. The application of these system is not cost-effective for moisture content of fuel around 35 %. It is possible to build this technology for 50 % of fuel moisture content, but technology will not raise the temperature parameters of hot water. There are two differences between Mladá Boleslav heating plant and Finnish Vuosaari power plant in Helsinky, where the similar unit is already built. First of them is moisture content of fuel more than 50 %. Second one is temperature of hot water system 60 °C, however in Mladá Boleslav is at least 80 °C, sometimes it could be more than 110 °C. The decreasing of this temperature is problem because the most of heating systems were designed by current standards with temperature 80 °C. The only possible solution is to build two steps scrubber and the waste heat utilize as preheater of hot water.

Correction: Cheng, Y. Carbon Derivatives-Directed International Supervision Laws and Regulations and Carbon Market Mechanism. Sustainability 2022, 14, 16157

The author would like to make the following corrections about the published paper [...]