EU EU Emissions Trading System Research Articles

Shipping in the EU emissions trading system: implications for mitigation, costs and modal split

ABSTRACT EU recently decided to include shipping, meaning all intra-European shipping and 50% of extra-European voyages, in the EU Emissions Trading System (ETS) beginning in 2024. This article provides an early assessment of the impacts of the EU ETS on the shipping sector’s potential reductions in greenhouse gas emissions for different types of ships. It further examines selected mitigation measures and the impact on modals split and costs. The study employs a mixed-methods approach combining quantitative estimates (based on data from the EU monitoring, reporting and verification system) with qualitative data and information from interviews with key actors and from previous literature. This approach aims to provide a comprehensive understanding of the impacts of the EU ETS. The inclusion of shipping in the EU ETS is expected to introduce significant incentives to reduce emissions. We estimate that switching to bio-methanol at an emissions allowance price of €90–100/tCO2 will be cost-effective for a minor share of shipping segments (representing about 0.5-5% of all ships), whereas at a price above €150/tCO2 it could be cost-effective for a considerable share (potentially 75%) of ships. In the short term, the costs incurred by the EU ETS will be passed on to transport customers as a surcharge. The increased cost may, unless properly addressed, drive carbon leakage. Meanwhile, a modal shift away from shipping may occur in the roll-on, roll-off (RoRo) and roll-on passenger (RoPax) segments due to direct competition with road and rail transport and the relative ease of shifting to other modes of transport.

Interpretable EU ETS Phase 4 prices forecasting based on deep generative data augmentation approach

This paper proposes an interpretable deep learning method based on generative data augmentation for forecasting carbon allowance prices in the EU Emissions Trading System (ETS) Phase 4. Utilizing TimeGAN, we generate near-real expanded data to enhance the training sets. Temporal Fusion Transformer (TFT) is used to quantify the contribution of impact factors. The results show that the augmentation effectively improved the prediction accuracy. Interpretability analysis reveals that Brent crude oil, NBP natural gas, and Rotterdam coal are the top three contributors. Our findings offer a strong approach for the new phase price forecasting, helping market participants and policymakers in informed decision-making.

A coordination failure between EU climate policies exemplified by the North Sea energy island

ABSTRACT We highlight a coordination problem between the EU Emissions Trading System (ETS) and the EU's offshore renewable energy strategy. We exemplify this coordination failure by analyzing carbon leakage effects associated with Denmark's planned North Sea energy island. The Danish energy island project will not start production before 2033, implying a long interval between project announcement and production. Using a dynamic model of the EU ETS, we show that the large time gap between announcement and production likely results in a ‘Green Paradox’, where the energy island increases aggregate EU ETS emissions. The mechanism leading to the emission increase is complicated and works through the Market Stability Reserve (MSR). The estimated 2050 leakage rate is 145 percent in our main scenario and not below 100 percent in any alternative scenario. We discuss how to improve the climate benefits of the energy island or similar large-scale renewable energy projects. This includes possible revisions to the EU ETS and the role of Power-to-X technologies.

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.

EU Climate Change News Index: Forecasting EU ETS prices with online news

Carbon prices have been rapidly increasing in the EU since 2018 and accurate forecasting of EU Emissions Trading System (ETS) prices has become essential. This paper proposes a novel method to generate alternative predictors for daily ETS price returns using relevant online news information. We devise the EU Climate Change News Index by calculating the term frequency–inverse document frequency (TF–IDF) feature for climate change-related keywords. The index is capable of tracking the ongoing debate about climate change in the EU. Finally, we show that incorporating the index in a simple predictive model significantly improves forecasts of ETS price returns.

Legitimacy and Consistency of Free Allocation in the EU ETS: The Role of Substitutes in Product Benchmarks

The EU emission trading system (ETS) is the primary tool for reducing greenhouse gas emissions (GHG) and combating climate change. Free allocation of emission allowances plays an important role within this system, and will continue to do so, also after the European Commission’s ‘Fit for 55’ proposal package. This article discusses the determination of free allocation by use of product benchmarks, and the assessment of substitutability under the product benchmark system, and how they relate to the legitimacy and proper functioning of the ETS. It is argued that a coherent, ETS-specific test should be applied when the Commission assesses the substitutability that underpins the product benchmarks, and that full judicial review is warranted going forward, akin to that deployed by the EU courts in competition cases. Emission trading system, EU ETS, free allocation, benchmark, substitute

Raising climate ambition in emissions trading systems: The case of the EU ETS and the 2021 review

We provide a quantitative assessment of policy options to inform the 2021 review of the EU Emissions Trading System (ETS) and raise climate ambition. We use a permit trading model in which firms utilize rolling finite planning horizons, which replicates historical price and banking developments well compared to an infinite horizon. When firms have bounded foresight, indirectly raising ambition through the Market Stability Reserve (MSR) is not equivalent to directly raising ambition through the emissions cap trajectory. Leveraging the MSR turns out to be efficiency improving as it compensates for firms’ bounded foresight by frontloading abatement efforts. We analyze the MSR interaction with the cap trajectory to exploit synergies and minimize the cost of raising ambition. We also provide a comparative assessment of a complete suite of changes in the MSR parameters. Whatever its parameters, MSR-induced resilience to demand shocks remains limited by design: the MSR acts more as an unconditional price support provider than as a responsive price stabilizer.

Is border carbon adjustment the right tool for the power sector?

ABSTRACT Carbon leakage occurs in any carbon pricing regime that is not global, which means all of them so far. That is inherently unfair to sectors that are subject to a carbon price but compete with those that are not. The European Green Deal aims to rectify the problem in the EU Emissions Trading System (ETS) by moving beyond the current second (or third) best option, which allocates emissions quotas for free for industrial sectors, and by putting a price on carbon at the EU border for selected but not yet named sectors. Our recent model-based analysis compares the impact of a future border carbon adjustment (BCA) mechanism for the power sector with the option of extending the EU ETS to countries exporting power to the EU. We demonstrate how differences in the two policy tools translate into markedly different impacts. We conclude that expanding the geographical scope of the EU ETS is a more effective climate policy tool than a BCA. First, it would reduce emissions, while a BCA would not. Second, emission trading brings real competition: Regions neighbouring the EU will be better integrated into the EU single market with a level playing field and lower greenhouse gas emissions. On the other hand, the BCA would fence off the EU power sector and increase greenhouse gas emissions. Third, compared to a border carbon tax, expanding the ETS also yields more revenue to exporting neighbouring countries facing higher-than-average challenges to change their fossil-heavy power systems. Key policy insights The introduction of a new policy tool, the border carbon adjustment mechanism, which aims to create fair competition and trigger more ambitious climate policy action in trading partners, is a legitimate action of the European Union. However, the extension of EU ETS is a more effective climate policy tool than a border carbon adjustment mechanism as the latter increases overall emissions. The border carbon adjustment mechanism is rather a competition policy tool that provides a level playing field for electricity producers inside and outside the EU. The price impact of the policy tool choice merits attention: the extension of the EU ETS drives up prices in neighbouring countries (except the West Balkan region), but the additional quota revenues can be used to alleviate the burden on vulnerable social groups.

Implications of the EU Emissions Trading System (ETS) on European container routes: A carbon leakage case study

The paper focuses on the impacts of the inclusion of the maritime sector in the EU Emissions Trading System (ETS). The enforcement of a regional Market-Based Measure (MBM) such as the EU ETS may provide financial incentives to shipping operators to reconfigure their networks and avoid voyages inside the European Economic Area (EEA). This paper investigates the risk of container vessels engaging in evasive port calls by replacing EEA transshipment hubs with nearby non-EEA competitors. We perform a cost–benefit analysis that calculates the cost of EU Allowances (EUAs) for several international services and compares it with a relocation scenario. Our case studies focus on the Piraeus–Izmir and the Algeciras–Tanger Med scenarios and identify the EU carbon price turning point that will render the switch of the transshipment hubs a cost-effective choice for the operator. The results show that the preference of a non-EEA hub will become attractive for carbon prices well below 25 EUR per metric ton of CO2. Further, in all cases, the hub switch results in a rise in the overall carbon emissions attributed to the service which amplifies the risk of carbon leakage. Our results show that the relocation would lead to revenue loss for the EU ETS and penalization of the EEA transshipment hubs in close proximity with hubs outside the EEA, thus posing a threat to their economic activity and development.

A comparative evaluation of market based measures for shipping decarbonization

The purpose of this paper is to provide an overview and discussion of potential Market Based Measures (MBMs) under the Initial IMO Strategy for the reduction of greenhouse gas (GHG) emissions from ships. In this context, some related developments are also seen as directly relevant, mainly in the context of the possible inclusion of shipping into the EU Emissions Trading System (ETS). A comparative evaluation of maritime MBMs is made using the following criteria: GHG reduction effectiveness, compatibility with existing legal framework, potential implementation timeline, potential impacts on States, administrative burden, practical feasibility, avoidance of split incentives between ship-owner and charterer, and commercial impacts. The paper breaks down potential MBMs into the following classes: Bunker levy/carbon levy MBMs, ETS (global and/or EU ETS) MBMs and other MBM proposals.

Endogenizing the Cap in a Cap-and-Trade System: Assessing the Agreement on EU ETS Phase 4

In early 2018, a reform of the world’s largest functioning greenhouse gas emissions cap-and-trade system, the EU Emissions Trading System (ETS), was formally approved. The reform changed the main principles of the system by endogenizing the emissions cap. We show that the emissions cap is now affected by the allowance demand and is therefore no longer set directly by EU policymakers. As a consequence, national policies that reduce allowance demand can now reduce long-run cumulative emissions, which is not possible in a standard cap-and-trade system. Using a newly developed dynamic model of the EU ETS, we show that policies that reduce allowance demand can have substantial effects on cumulative emissions after the reform. Model simulations also suggest that the reform reduces long-run cumulative emissions and, to a lesser extent, reduces emissions in the short run. Even so, the reform has a small short-run impact on the currently large allowance surplus.

Political conflict and climate policy: the European emissions trading system as a Trojan Horse for the low-carbon transition?

ABSTRACT Many economists, businesses, and policymakers view carbon pricing as the single best policy approach to address climate change. Such optimism, however, tends to neglect the political conflicts surrounding climate policy and the necessity to accelerate the ongoing low-carbon energy transition. To unveil these conflicts, we analyze the responses of key actors to public consultations in 2015–16 concerning the EU emissions trading system (ETS) and the EU renewable energy directive. From this, we identify a prominent policy position contending that climate policy should focus on the ETS given its purported efficiency. Some actors who share this position use the ETS as a Trojan Horse – a strategy to divert attention from, and fend off, more ambitious climate action in the form of complementary renewable energy policies. Such political strategies do not just undermine carbon pricing but impede the energy transition at large. However, we also find energy industry incumbents that express support for a much stronger ETS and more effective climate policy. Therefore, it seems that the ‘Trojan Horse strategy’ may fail and the low-carbon transition might gain increasing support from a broad range of stakeholders. Even so, we argue that any singular climate policy approach risks political capture and that a mix of policies will be necessary to accelerate the ongoing transition. Key Policy Insights Major European industry actors tend to advocate the EU ETS as the primary climate policy instrument. Some European industry actors have used the EU ETS as a Trojan Horse – to fend off strict climate action and to slow down the low-carbon energy transition. Political conflicts surrounding individual climate policies reflect much larger struggles over the direction and pace of the energy transition. Climate policy should not rely too heavily on a single instrument but rather include a mix of measures that promote both low-carbon innovation and the decline of carbon-intensive industries, technologies and practices.

Effects of European emission unit allowance auctions on corporate profitability

During Phase 3 of the EU Emission Trading System (ETS), to remedy the so-called windfall profits obtained by companies that benefited from the free allocation of emission permits, the EU introduced an auction-based method for the allocation of carbon emission allowances. We estimate the effect on firms' profits from participating in auctions during Phase 3 of the EU ETS using a propensity score matching approach. The work shows that the introduction of the new market mechanism for allocating carbon emission allowances has no significant effect on corporate profits, whatever the measure of profitability used. From a policy standpoint, this result seems to suggest that this new allocation mechanism might fail to improve the incentives for companies to increase their production cost efficiency or to invest in breakthrough technologies that reduce CO2. The rather flat auction price trend seems to support this conclusion.

Assessing the impact of ETS trading profit on emission abatements based on firm-level transactions

The EU Emission Trading System (ETS) is the oldest and currently the largest carbon market in the world, but its purpose of stimulating carbon emissions via trading profits remains unexamined. Based on the complete firm-level transaction records of the EU ETS Phases I and II, here we show that the participating firms’ trading profits and their emission abatements are positively correlated, and the correlation becomes stronger in Phase II than Phase I. Specifically, we observe that non-linearity exists in the correlation; higher firm-level emission abatements can realize larger trading profits. This pattern affects the market fairness, though it may be helpful to incentivise emission abatements. The correlation is more regulated in Phase II than it is in Phase I, thereby indicating that the Phase II is more mature. We also observe that the state-level abatements are largely driven by industrial giants.

Relation of economic and environmental indicators to the European Union Emission Trading System: a spatial analysis

Abstract The main goal of this contribution is to evaluate the development of CO2 emissions and selected economic indicators of EU28 countries in the period from 2005 to 2015, and to capture geographical pattern and spatial distribution of countries emitting pollution. This will be performed within the context of the EU Emissions Trading System (ETS), which has represented a major scheme in Europe to cope with CO2 emissions since 2005. The actual situation in the field of the EU ETS is described and key scientific studies focusing on the EU ETS are presented. Based on a broad set of indicators we examine and evaluate possible geographical pattern in the development of selected indicators within the EU and provide detailed spatial analysis of economic and environmental data of EU28 countries, with the use of (geo)visual analysis of spatial data and spatial statistics (grouping analysis). The preliminary results of the (geo)visual analysis show that CO2 emissions within EU countries were decreasing in the selected period 2005–2015, with some exceptions (e.g. Iceland and Latvia). As the development of CO2 emissions in all EU countries is not similar, the other economic and environmental indicators were included (e.g. GDP, Investments) into the analysis in order to reveal a common (geographical) pattern and explain the current situation. Based on grouping/cluster analysis, it is possible to form territorial groups of EU states with similar development, which are almost perfectly in the line with current EU member states strategies of CO2 emissions trade. The current auction markets are well in tune with geographical and economic characteristics of particular EU countries. Results of grouping analysis of all indicators in 2015 using six K-nearest neighbours underline current separate auction markets for Germany, the United Kingdom and Poland.It indicates that the system of emission auctions has logical background and the markets represent natural platforms for emission trading, corresponding to both economic and spatial characteristics of particular countries/polluters. Presented approach thus brings valuable information for policymakers both on the national and international level for the next phases of EU ETS scheme planning.

Oil and power industries’ responses to EU emissions trading: laggards or low-carbon leaders?

ABSTRACTHow have petroleum and power companies and their European industry associations responded to the EU emissions trading system (ETS)? Responses can be political, directed externally towards the initiation and reforms of the EU ETS itself, or internally and market-based, directed at low-carbon solutions. Proactive response strategies shape companies’ leadership potential. Variation in responses is explained by two models that differ in assumptions about corporate behaviour as well as the wider multilevel regulatory context in which companies operate. Responses are found to have converged within the two industries, with reactive companies following the proactive ones. Secondly, responses between the two industries increasingly diverge, with the power industry becoming much more proactive than the petroleum industry. The main explanation is found in the differing relevance of the two models and the wider regulatory context, particularly differing exposure to international competition and weak international climate agreements.

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

ABSTRACTEnvironmental policies may have important consequences for firms’ competitiveness or profitability. For the European Union Emissions Trading System (EU ETS) the empirical literature documents that significant emissions reductions have resulted from it. Surprisingly, however, the literature shows that there have been hardly any concurrent negative effects on firms’ competitiveness during the first two phases of the scheme (2005–2012). We show that the main explanations for the absence of negative impacts on competitiveness are a large over-allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may have limited the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013–2030).Key policy insightsEmpirical literature on the EU ETS shows that there have been hardly any effects on firms’ competitiveness or profitability.One main explanation is a large over-allocation of emissions allowances leading to a price drop. This reduced incentives for innovation.Moreover, firms were able to pass costs on to consumers in some sectors which partly generated windfall profits.Innovation effects have so far been small but positive.We expect to see no negative competitiveness effects on regulated firms in the near future suggesting that no further reliefs for regulated firms are required.

The Catalan Economy towards the New European Energy Policy: Through Accounting of Greenhouse Emission Multipliers

The aim of this paper is to study the effect that implementing the agreement signed by the European Union at the end of 2008 will have on reducing greenhouse gas emissions in Catalonia. Emission multipliers and the impact of reducing emissions by 10%, in sectors not covered by the EU ETS (EU Emissions Trading System) and reducing those that are covered by 21%, are analysed. More specifically, the effects on the endogenous income of the multiplier model (production, factorial and private income) is studied, while reducing and increasing endogenous income and the decomposition of emission multipliers into open, own and circular effects is analysed to include the different channels of the process of generating CO2 equivalent emissions. The empirical application is for the Catalan economy and uses economic and environmental data for the year 2001. The results show that increases in greenhouse gas emissions will essentially depend on the account that receives the exogenous inflow in demand. Greenhouse gas emissions in Catalonia are affected very differently at the sectoral level and the effects of production activities, factors of production and consumption on air pollution are very heterogeneous. The analytical approach used in this paper provides interesting results that can help to design and implement policies to reduce emissions.

Cost-effective decarbonization in the EU: an overview of policy suitability

This article seeks to provide an overview of the potential ability of the current EU climate policy suite to deliver a cost-effective, low-carbon transition, based on the sectoral characteristics of such a transition projected by four modelling studies for 2030 and 2050. Assessments are made on a sectoral level, based on theoretical considerations and the empirical literature. In the power generation and industry sectors, reforms to the EU ETS (EU Emission Trading System) are unlikely to achieve their stated objectives; however they are likely to induce abatement commensurate with minimum requirements. A more pressing issue in the power sector is electricity market design, currently incompatible with increasing penetration of renewables. In the industry sector, the continuation of free permit allocation into Phase 4 of the EU ETS is likely to prevent substantial change in the short to medium term. In the residential building and passenger car sectors, practical underachievement despite reported compliance against the targets set by their primary instruments, along with a lack of instrument credibility, long-term clarity and requirements, may prove substantial barriers to achieving required milestones. The presence of non-climate policy instruments that act to dull the effect of the climate policy landscape, or induce perverse financial incentives, is also a significant obstacle.Policy relevanceThis article synthesizes the results of key modelling studies that seek to project pathways for a cost-effective, low-carbon transition, and highlights whether the existing suite of EU-level policy instruments are likely to be suitable for driving the changes required to achieve key milestones in 2030 and 2050, as projected by the modelling results. We summarize the key elements of the policy landscape on a sectoral basis (power generation, heavy industry, passenger car transport and residential buildings), and examine potential effectiveness based on a priori considerations and the empirical literature. As a result, priority elements for policy attention may be distilled.

Carbon pricing in the EU: Evaluation of different EU ETS reform options

This paper studies various options to support allowance prices in the EU Emissions Trading System (ETS), such as adjusting the cap, an auction reserve price, and fixed and variable carbon taxes in addition to the EU ETS. We use a dynamic computable general equilibrium model that explicitly allows for allowance banking and for a detailed cost-effectiveness analysis at the EU Member State level. We find that tightening the cap provides an ad hoc solution to the fundamental issue of the robustness of the effective carbon price, while introducing a price component to the ETS brings structural carbon price support in times of negative demand shocks for emission allowances. These price-based policies still benefit from the intertemporal flexibility through the banking provision in the EU ETS by re-allocating emissions over time with stronger emission reductions in early years and emission increases in later years. A higher emission price has a larger negative impact on the new Member States' economies than on other Member States. Furthermore, introducing a carbon tax in addition to the EU ETS decreases the price of allowances, resulting in welfare gains for net buyers of allowances while net sellers are worse off.