European Carbon Research Articles

Assessing the Emissions Related to European Households’ Expenditures and Their Impact on Achieving Carbon Neutrality

The European Green Deal comprises various policy initiatives with the goal of reaching carbon neutrality by 2050. The “Fit for 55 packages” include the Social Climate Fund, which aims to help, among others, vulnerable households and transport users meet the costs of the green energy transition. Thus, analyzing households’ expenditures and the associated carbon emissions is crucial to achieving a net-zero society. In the present study, we combine scenarios of households’ expenditures according to the Classification of Individual Consumption According to Purpose with economic decoupling scenarios to assess, for the first time, the European carbon budget allocation on a consumption basis. Expenditure projections based on socioeconomic scenarios were calculated using the Bayesian structural time series, and the associated emissions were estimated through the greenhouse gas intensity of the Gross Domestic Product. The model can be used to report the carbon budget of households and monitor the effectiveness of the measures funded by the Social Climate Fund. However, the emissions burden obtained by means of averaged greenhouse gas intensity of Gross Domestic Product results in a rough approximation of outcomes, and more accurate indicators should be developed across the member states.

The relationship between the contaminating industries and the European carbon price, machine learning approach

This study explores the bidirectional relationship between the industrial stock returns of greenhouse gas (GHG) emitting industries in the European Union (EU) and the European Union Allowance (EUA) price for the period of 2015–2022 by applying novel supervised machine learning (ML) models combined with a granger vector auto regression (VAR) test. Research findings present bidirectional causality and factor significance scores for each industry index in addition to performance metrics of the applied ML models. Results identify the chemicals, renewable energy, meat, electricity, iron&steel, transportation, construction, manufacturing, and cement industries as the most significant factors in explaining the EUA price volatility, while the Extra Trees (ET), K-Nearest Neighbor (KNN), Recurrent Neural Networks (RNN), and Random Forest (RF) models are determined to be the top performers. From the political perspective, research outputs conclude that the current carbon price is below the marginal decarbonization cost and fails to stimulate the technological decarbonization investments for the majority of the contaminating industries of the EU.

Reference of European Carbon Market to Chinas Carbon Market under the Unified National Market

Under the goal of global net zero emissions, China has established a carbon market to limit and allocate carbon emissions. Based on the establishment of China's national unified market and the official operation of China's carbon market, this paper compares China's carbon market with Europe's carbon market. Firstly, this paper first reviews the relevant papers, mainly including the summary of the development experience of the four stages of the European carbon market, the reference significance of the European carbon market for China's carbon market, and the scale advantage in the carbon market. Then, the paper compares and analyzes the European carbon market and China's carbon market from three aspects: regional development imbalance, financial attributes and limitations of the carbon market. It also analyzes the role that China's national unified market can play in the development of carbon market. Finally, this paper puts forward suggestions for China to use the national unified market to develop the carbon market from two aspects: reducing regional development imbalance and developing carbon financial instruments and financial products.

Identifying the determinants of European carbon allowances prices: A novel robust partial least squares method for open-high-low-close data

This study investigates whether energy prices and macroeconomic indicators are determinants of the European Union Allowance (EUA) prices and how their relationships changed in the Phase III of the European Union Emission Trading Schema (EU ETS). An innovative application of the partial least squares (PLS) regression model for open-high-low-close (OHLC) data is proposed and implemented. The OHLC prices of EUA, pivotal energy prices, and macroeconomic indicators spanning the period from 2013 to 2020 are considered in the models. Based on the average results from 2015 to 2020, the energy prices of Brent crude oil, gasoline, and diesel provide stronger explanatory power for EUA prices than macroeconomic indicators, including the European Industrial Development Index, STOXX 600, STOXX 50, CAC 40, FTSE 100, and DAX 30. However, the price of coal does not appear to exert a significant influence on the pricing of EUA throughout the investigated period. The correlation between EUA prices and macroeconomic indicators appears to strengthen over time, while the interpretation degree of energy prices on EUA prices decreases. EUA increasingly manifests its financial attributes in later Phase III of the EU ETS. Based on the regression results, investment suggestions are provided for quota traders to hedge portfolios.

Residential CO2 Emissions in Europe and Carbon Taxation: A Country-Level Assessment

This paper examines the determinants of residential CO2 emissions, which are not covered by the European Union Emissions Trading System (EU ETS), in 19 European countries between 2000-2017. Using both static and dynamic panel models, we found strong relationships between CO2 emissions per capita, GDP per capita, energy prices and heating needs. We then assessed the impact of European carbon taxation and show that a €20/tonne CO2 tax lowers emissions by 1% on average. We found that this tax affects countries differently in terms of tax revenue-to-GDP ratio. Poland and the Czech Republic would have to pay the highest contribution, and Portugal and Denmark the lowest. Finally, we propose a scenario that equalizes countries’ tax burdens. We show that, were Europe to redistribute all tax revenues, the main beneficiaries would be Poland and Belgium, while Denmark and Luxembourg would have to pay a surtax.

The European Carbon Border Adjustment Mechanism and its WTO Compatibility

The European Carbon Border Adjustment Mechanism and its WTO Compatibility

Retraction

Retraction: Zhu, B., Wang, P., Chevallier, J., & Wei, Y.‐M. (2021). Enriching the value‐at‐risk framework to ensemble empirical mode decomposition with an application to the European carbon market. International Journal of Finance & Economics, 2023; 28: 2975–2988. https://doi.org/10.1002/ijfe.2578The above article from the International Journal of Finance & Economics, published online on 21 September, 2021 in Wiley Online Library (wileyonlinelibrary.com), has been retracted by agreement between the journal's editor‐in‐chief, Keith Pilbeam, the authors, and John Wiley & Sons Ltd. This action has been agreed due to an error at the publishers which caused this duplicate of the article below to be published on 21 September, 2021. The correct version of the article is to be found at: Zhu, B, Wang, P, Chevallier, J, Wei, Y‐M, Xie, R. Enriching the VaR framework to EEMD with an application to the European carbon market. International Journal of Finance & Economics. 2018; 23: 315–328. https://doi.org/10.1002/ijfe.1618.

Foreignness as an Asset: European Carbon Regulation and the Relocation Threat among Multinational Firms

Foreignness as an Asset: European Carbon Regulation and the Relocation Threat among Multinational Firms

Time-Varying and Scale-Dependent Informational Efficiency of the European CO2 Emissions Market: An Analysis Based on Singular Value Decomposition Entropy

This work examined the informational efficiency of the European CO2 emission trading market for the different implementation phases in the period 2008–2022:Q3. The approach is based on a bootstrap singular value decomposition (SVD) approach and the analysis was conducted for a rolling window to assess the time-varying efficiency and over different time scales. The impact of the COVID-19 lockdown and the Russia–Ukraine conflict was evaluated. The results showed that the informational efficiency changes over time and scales, which is in line with adaptive market hypothesis (AMH) notions. High market efficiency was exhibited in Phase II (2008–2012), but large deviations from efficiency, especially for quarterly scale, were exhibited in Phase III. However, Phase IV has shown a behavior consistent with informational efficiency. The COVID-19 outbreak negatively impacted informational efficiency. On the other hand, it seems that the Russia–Ukraine conflict has improved informational efficiency due to the European decisions to move to energy independence policies. The findings in this study suggest that the European carbon market is gradually attaining a state of financial maturity.

Can China's national carbon trading market hedge the risks of light and medium crude oil? A comparative analysis with the European carbon market

The study explores whether China's national carbon market can hedge the risks of light and medium crude oil compared with the European carbon market, through the diversified and hedging portfolios estimated by the NAGARCHSK-Mixed Copula. The current work confirms the existence of conditional higher moments and asymmetric tail dependence structures in the crude and carbon markets. Furthermore, for all crude oil, although the China's carbon market is slightly inferior to the European carbon market in terms of hedging costs and stability, the hedging effectiveness of the former is better than that of the latter. And Oman crude oil gets better hedging protection from the carbon markets than Brent crude oil. Finally, the diversified portfolios obviously outperform the hedging portfolios in terms of hedging effectiveness.

Углеродный сбор Евросоюза:на пересечении климатической и внешнеторговой политики

The European Union (EU) is getting ready for the implementation of СBAM — the world’s first carbon border adjustmentmechanism. This article explores the correlation between intra-European and international facets of СBAM as two sides ofthe same coin: while appending the EU Emissions Trading Scheme, it is equally an instrument of foreign trade, immediatelytouching upon EU relations with trade partners and specialized international organizations. Once such correlation is takeninto account, it becomes evident why the design of the European carbon levy remains capable of improvement as far as fightingclimate change goes.The concept of multilevel governance assists this research as the basis for analyzing СBAM. The institutionalist approachclarifies the specifics of the European carbon border adjustment mechanism. They are important in order to scopeout its true perspective. In particular, the MLG approach helps to expose the blurred lines between market regulation andtax policy in European governance practice.The ways, if any, that СBAM differs from a carbon tax and, at the same time, is similar to a carbon tariff are considered.A reappraisal made in the article of this hybrid measure makes it possible to draw a conclusion that, as envisioned bythe European Commission, it is meant to ensure more favourable conditions for investments in cost-intensive, low-carbontechnologies while suppressing competition from cheaper, high-carbon imports. At the same time, so as to avoid unleashingtrade wars, it is important for the Commission to assure the maximum possible conformity of СBAM to the World TradeOrganization’s (WTO) legal requirements. Compatibility with WTO law would enhance the ecological legitimacy of theregulatory mechanism in question. It would make sure that international partners would not regard СBAM as a form ofgreen protectionism.Further, the subtle aspects of preferences in terms of СBAM design are discussed, as held by the Commission, EUmember states, the European Parliament, and the representatives of European carbon-intensive industries. Particular attentionis paid to the discussion in the EU on the issue of connecting export rebates for inside producers to CBAM.

Changes in land use and management led to a decline in Eastern Europe’s terrestrial carbon sink

Land-based mitigation is essential in reducing net carbon emissions. Yet, the attribution of carbon fluxes remains highly uncertain, in particular for the forest-rich region of Eastern Europe (incl. Western Russia). Here we integrate various data sources to show that Eastern Europe accounted for an above-ground biomass carbon sink of ~0.41 gigatons of carbon per year over the period 2010–2019, that is 78% of the entire European carbon sink. We find that this carbon sink is declining, mainly driven by changes in land use and land management, but also by increasing natural disturbances. Based on a random forest model, we show that land use and management changes are main drivers of the declining carbon sink in Eastern Europe, although soil moisture variability is also important. Specifically, the saturation effect of tree regrowth in abandoned agricultural areas, combined with increasing wood harvest removals, particularly in European Russia, contributed to the decrease in the Eastern European carbon sink.

The Macroeconomic Impact of Europe’s Carbon Taxes

We estimate the macroeconomic impacts of carbon taxes on GDP and employment growth rates using 30 years of data on carbon taxation in various European countries. We find no evidence for a negative impact on employment or GDP growth but rather find a zero to modest positive impact. We also find a cumulative emissions reduction on the order of 4 to 6 percent for a $40/ton CO2 tax covering 30 percent of emissions. Reductions would likely be greater for a broad-based US carbon tax since European carbon taxes typically do not cover those sectors with the lowest marginal abatement costs. (JEL E23, E24, H23, Q54, Q58)

Impacts of national vs European carbon pricing on agriculture

The agricultural sector has the potential to contribute to reaching both global and national climate targets. Lately, frequent discussions emerge among academics as well as policymakers regarding whether the agricultural sector should be subject to carbon pricing under different emission trading systems. Germany has set ambitious climate targets envisaging to reach carbon neutrality by 2045, and the EU plans reaching carbon neutrality by 2050. However, the current GHG emission mitigation trends are not in line with this goal. In this study, we quantitatively analyze the environmental and economic effects of the possible inclusion of the agricultural sector into a carbon pricing scheme, once for Germany only, and second for the EU. Moreover, we evaluate the role of already existing and novel technological mitigation options in the GHG emissions mitigation quest. Our findings demonstrate that even the unilateral action by Germany leads to net agricultural emissions reduction, although, the effect obtained by the EU-wide implementation of carbon pricing in agriculture is fivefold larger. The results also highlight the importance of stimulating the use and transferability of the technological options not only in mitigating GHG emissions but also in alleviating the emission leakage to third countries and easing the economic consequences of such a policy.

From climate risk to the returns and volatility of energy assets and green bonds: A predictability analysis under various conditions

The importance of climate risk as a source of systemic risk for financial markets and the decisions of investors, portfolio managers, and regulators is growing. We examine the directional predictability from two climate risk measures, transition risk and physical risk, to the returns and volatility of European brown and green energy stocks, European carbon emission allowances, and global green bonds. Using daily data, we apply a cross-quantilogram approach in a time-varying setting to measure potential differences in the predictability across quantiles and over various crisis periods. The return predictability results are more pronounced for transition risk than physical risk, especially for brown energy stocks and carbon emission allowances, and they generally vary across periods and markets conditions. The predictability of volatility is also significant at specific time periods and volatility states, especially from transition risk, and the sign of the predictability is positive for brown energy and carbon emission allowances whereas it is negative for green bonds. We show that a lower-than-expected level of discussion about the transition process leads to a heightened volatility of brown energy markets. These findings have important implications regarding climate risks assessment on return and volatility predictability and climate risk and portfolio decarbonization under COP26.

Do State‐Of‐The‐Art Atmospheric CO2 Inverse Models Capture Drought Impacts on the European Land Carbon Uptake?

AbstractThe European land carbon uptake has been heavily impacted by several recent severe droughts, yet quantitative estimates of carbon uptake anomalies are uncertain. Atmospheric CO2 inverse models (AIMs) provide observation‐based estimates of the large‐scale carbon flux dynamics, but how well they capture drought impacts on the terrestrial carbon uptake is poorly known. Here we assessed the capacity of state‐of‐the‐art AIMs in monitoring drought impacts on the European carbon uptake over 2001–2015 using observations of environmental variability and vegetation function and made comparisons with bottom‐up estimates of carbon uptake anomalies. We found that global inversions with only limited surface CO2 observations give divergent estimates of drought impacts. Regional inversions assimilating denser CO2 observations over Europe demonstrated some improved consistency, with all inversions capturing a reduction in carbon uptake during the 2012 drought. However, they failed to capture the reduction caused by the 2015 drought. Finally, we found that a set of inversions that assimilated satellite XCO2 or assimilated environmental variables plus surface CO2 observations better captured carbon uptake anomalies induced by both the 2012 and 2015 droughts. In addition, the recent Orbiting Carbon Observatory—2 XCO2 inversions showed good potential in capturing drought impacts, with better performances for larger‐scale droughts like the 2018 drought. These results suggest that surface CO2 observations may still be too sparse to fully capture the impact of drought on the carbon cycle at subcontinental scales over Europe, and satellite XCO2 and ancillary environmental data can be used to improve observational constraints in atmospheric inversion systems.

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

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

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.

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)

Forecasting European Union allowances futures: The role of technical indicators

With the aim of studying the prognostic power of monthly European Carbon futures prices, we employ a wide variety of potential forecasting indicators, including economic variables like uncertainty indicators, energy prices, and stock index data, in addition to exploring the influence of technical indicators on forecasting for the first time. In both in-sample and out-of-sample results, technical indicators display statistically significant ability, exceeding that of economic variables. To gain valuable insight into which indicators are comparatively relevant to the price of EUAs, three types of forecasting methods: univariate predictive regression, dimensionality reduction techniques, and ensemble learning algorithms are applied. Results show that the first diffusion index in the principal component regression and partial least squares model is greatly influenced by the changes of technical indicators, while only having a weak association with economic variables. With respect to ensemble learning algorithms like Xgboost, greater importance is given to technical indicators compared to economic variables when making predictions. Furthermore, technical indicators demonstrate stable economic value to investors in the form of positive CER gains. Our findings present novel evidence for the predictive capacity of technical indicators and can assist policymakers in formulating sustainable and effective energy policies.