European Emission Trading Scheme Research Articles

Climate regulation costs and firms’ distress risk

AbstractIn 2013, the European Union's Emission Trading Scheme (EU‐ETS) entered Phase III. The majority of emission permits in Phase III are auctioned instead of being allocated for free as in Phases I and II. Using a difference‐in‐differences method, we show that this change has led to an increase in the financial distress risk of the EU‐ETS‐regulated firms when compared to unregulated firms, suggesting that the EU‐ETS imposes a significant financial burden on regulated firms. This result is robust to an array of validation tests, alleviating concerns that it is driven by unobserved factors. In additional analyses we show that the increase in distress risk of regulated firms during Phase III can be explained by, (i) an additional climate regulation cost to purchase pollution permits and (ii) a low average environmental score that possibly (via high sustainability risk) lowers investors expectations regarding firms’ performance. Our findings also show that the distress risk increase is higher for regulated firms operating within countries with lower control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice accountability before the EU‐ETS implementation.

Estimating the effect of an EU-ETS type scheme in Australia using a synthetic treatment approach

Experts commonly believe that Australia needs to intensify efforts to meet its 2030 emission target (OECD, 2019). A carbon policy that has been considered and was briefly implemented and repealed by the Australian government is a European Union style Emission Trading Scheme (EU-ETS). We estimate the hypothetical impact of Australia adopting an emissions trading policy in 2005, which corresponds with the establishment of the EU-ETS. We develop a synthetic treatment approach that constructs a counterfactual measure of Australian carbon emissions that makes use of the time series properties of pre-2005 and post-2005 emissions in European countries. While we find that this policy would have led to a statistically significant decrease in the Australian per-capita carbon emissions, the magnitude of this reduction would have been small and environmentally insignificant. We conclude that a more effective carbon policy rather than an EU-ETS type policy is needed to meet Australia’s emission target.

Taxonomy for Industrial Cluster Decarbonization: An Analysis for the Italian Hard-to-Abate Industry

The share of industry in final global energy consumption was more than 30% in 2020, of which, the hard-to-abate sectors accounted for almost 60% of total final consumption in industry. Similarly, in Europe, industry accounts for around 25% of final energy consumption. In order to reduce the impact of industry in energy consumption and greenhouse gas emissions, Europe has set many policies that support and regulate the sector, including pricing carbon emissions in a cap-and-trade scheme called the European Emission Trading Scheme (EU ETS). According to the EU ETS, in 2021 the verified emissions of all stationary installations were around 1.3 billion tons of carbon dioxide equivalent emissions. In 2021, the total allocated allowances amounted to around 1 billion tons of carbon dioxide equivalent emissions, half of which were freely allocated. After reviewing the existing modeling approaches for industrial clusters and the available datasets, and assessing the energy consumption and carbon dioxide emissions at plant level using a geographical information system approach (GIS), a taxonomy for industrial cluster decarbonization was introduced. This taxonomy shows that describing industry as sets of clustered installations rather than based on the conventional sectoral economic classification provides more insights into energy transition. First, the cluster description provides a more accurate techno-economic assessment based on a finer characterization of economies of scale compared to traditional energy systems models. Second, the industrial clustering approach may more realistically show the feasibility, in addition to the costs and benefits from coupling industry with transport (e.g., industrial fleets and logistics) or buildings (e.g., city scale), due to a more detailed representation of the energy sources and sinks.

Pricing carbon in the aviation sector: Evidence from the European emissions trading system

A policy change in the European Union's Emissions Trading Scheme (EU ETS) provides us with a unique opportunity to measure the impact of carbon pricing on aviation, the most climate-intensive mode of transport. We implement a difference-in-differences strategy on a sample based on all flights within Europe from 2010 to 2016 to examine the causal impact of the EU ETS on emissions and supply. We find that the EU ETS reduced emissions by 4.7% in the regulated routes relative to the counterfactual. When we restrict the sample to short-haul flights, routes on which competition from other means of transport may exist (less than 1,000 km), the reduction in emissions is 10.7%. Finally, the reduction in emissions is also high for low-cost airlines (−11%) but it is not statistically significant for network airlines. In sum, the EU ETS has helped to mitigate emission growth by 3 Mt CO2 per year during the period analyzed, but not to reduce absolute emissions in the sector, as needed.

How would ambitious CO2 prices affect air transport?

In the last years, scientists as well as political activists proposed the introduction of ambitious prices for all CO2 emitting sectors, including aviation. Suggested prices range from about 45 to 350 € per ton of CO2. Such prices are considered an indispensable element of a strategy aiming at stabilizing the global temperature increase well under 2.0 degrees Celsius (Paris objective). For comparison: As of May 2020, the price for European Emission Allowances in the European Emission Trading Scheme was about 20 €/t CO2. European Air Transport has been participating in this scheme on a mandatory basis since 2012.How would such ambitious CO2 prices affect air transport? How likely are a significant increase in airfares and a corresponding decrease in demand? This paper investigates the potential impacts of high CO2 prices on airfares and growth in aviation. For this, we analyze the relevant literature and conduct some model-based estimations. In addition, we provide a rough estimate of the economic impacts in case not only CO2 but all climate relevant species from aviation (NOx, SOx, H2O, aerosols, contrails and contrail cirrus) would become subject to emission pricing.

Strategic Planning of Regions and Territories in Europe for Low Carbon Energy and Industry Through Ccus: The Strategy Ccus Project

STRATEGY CCUS is a three-year project (2019-2022) funded by the H2020 research and innovation framework of the European Commission. It comprises 17 partners and is coordinated by BRGM (France). STRATEGY CCUS aims to provide realistic strategic plans from 2025 to 2050 for deploying carbon capture, utilization and storage (CCUS) in Southern and Eastern Europe, from a local to a European scale. Eight promising regions, within seven countries are being studied. Plans and roadmaps for these regions will be developed based on economic and environmental drivers, technical potential and social acceptance. The deployment of operational CCUS clusters starts by an appraisal at local and regional level. Available data for each promising region was mapped to indicate the technical potential of CCUS development in each region. Relevant groups of stakeholders were identified and invited to form Regional Stakeholder Committees within each promising region. These committees are working with project partners to consider regional factors and concerns as well as to elaborate scenarios of CCUS deployment in their respective regions to ensure early local participation. In the 3 most promising regions for the deployment of CCUS, Life Cycle Assessment (LCA), Multiregional Input Output (MRIO) analysis and Techno-Economic Assessment (TEA) designs will provide decision-support for the sustainable development of CCUS. Sound insights and a comprehensive diagnosis of the potential local business models associated with the different CCUS options will be provided for each region, as well as estimates for the sensitivity of the business model on storage capacity and injectivity data. CCUS roadmaps from 2025 to 2050 for each of the promising regions, with optional connections to existing CO2 infrastructure in the North Sea, will be elaborated. Scenarios will be based on the available relevant data and carried out in close exchange with the local stakeholders via the Regional Stakeholder Committees and the Industrial Club. Economic evaluation of each scenario will provide the main Key Performance Indicators (KPIs) such as cumulated CAPEX/OPEX required for each scenario, the cost breakdown per CCUS stakeholder, or for example the global costs expressed in €/t CO2 avoided per scenario. Lastly, an economic impact assessment will be performed at national and European levels in terms of volumes of quotas avoided for industries included in the European Emission Trading Scheme (EU ETS) with the CCUS scenarios and in terms of economic impact on the EU ETS carbon price. Exploitation and dissemination of the project’s results and findings engage with relevant end-users (industry and policy makers, local authorities), in order to pave the way for the operational implementation of CCUS clusters. The project is providing targeted information to multiple audiences (including the media and the public) and favoring dialogue, with a public policy perspective. The systematic approach followed by STRATEGY CCUS will facilitate the appraisal of new other promising regions and the creation of connection among them for the deployment of CCUS Europe-wide.

An experimental investigation of bilateral oligopoly in emissions trading markets

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union's Emissions Trading Scheme (ETS), can be dominated by relatively few large sellers or buyers. Previous studies on market power in emissions trading have assumed the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers. Using a laboratory experiment, our objective in this paper is to test the performance of an emissions trading market utilizing a double auction in a bilateral oligopoly. Our results suggest that the theoretical bilateral oligopoly models can better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by the theoretical bilateral oligopoly model. How market power is exercised depends on the curvature of the abatement cost function. If the marginal abatement cost function of buyers (sellers) is less steep than that of sellers (buyers), the price of permits is lower (higher) than that under perfect competition. This is because the market power of buyers (sellers) exceeds that of sellers (buyers). The price of permits is close to the perfect competitive price when all traders have the sameslope of the marginal abatement cost function.

Price stabilization mechanisms in China’s pilot emissions trading schemes: design and performance

ABSTRACT Following the experience of high price instability and unpredictability in the European Emissions Trading Scheme (ETS), the management of carbon prices is a key concern for Chinese authorities. The objective is to avoid excessive price volatility in daily trading and stabilize the intrinsic price trend. Building on environmental economics and financial market theories, this study reviews the design of carbon price stabilization mechanisms in China’s seven pilot ETSs and assesses their performance. The pilot ETSs have incorporated most price stabilization mechanisms recommended in the literature, including price ceiling–floor, intensity-based allocation, ex-post adjustment of allowances, intertemporal flexibility, and daily trading risk management. By examining this wide range of mechanisms, our analysis helps understand the different design options available to stabilize carbon prices. Furthermore, by decomposing carbon price data in the different pilot ETSs, our analysis helps evaluate the effectiveness of these mechanisms. Price ceiling–floor and intertemporal flexibility (update of ETS cap) are the most effective mechanisms for stabilizing the intrinsic price trend. Daily trading risk management mechanisms help control price volatility but have little impact on the intrinsic price trend. However, we are cautious about the desirability of regulatory intervention for influencing carbon market prices. Depending on the institutional context and their design, price stabilization mechanisms can cause regulatory uncertainty. KEY POLICY INSIGHTS The Chinese pilot ETSs provide unique input for understanding ETS regulations concerning price stabilization mechanisms and their effectiveness in achieving price stability. The details and sophistication of carbon price stabilization mechanisms can influence the performance of ETSs. Cap updates and price ceiling–floor mechanisms most significantly impact intrinsic price trends. To ensure the effectiveness of price stabilization mechanisms, it is important to separate mechanisms aimed at intrinsic price trends and at daily volatility. Excessive and unexpected regulatory intervention to stabilize prices may disturb market expectations and create uncertainty for investors.

Social preferences for distributive outcomes of climate policy

This study examines whether people exhibit social preferences for the distributive outcomes of climate policy when making actual donations towards such policies. In an online choice experiment, using a real donation mechanism, a sample of 95 members of the Danish public are provided 27 € and asked to make 16 donation choices among different climate policy options. The climate policies are described in terms of two main outcome variables: future effects on income in 2100 and present-time provision of co-benefits from climate policy. Both outcomes are described for three specific regions of the world, Western Europe, Southeast Asia and Sub-Saharan Africa. For each participant, one policy choice is drawn at random to be realized. The total amount donated by participants is used to purchase and withdraw CO2 quotas and credits in the European Emission Trading Scheme and as donations to the UN Adaptation Fund. The results indicate that distributional outcomes matter for people when they donate to climate policy and that elements of both inequity aversion and general altruism influence the choice of climate policy. The findings contribute towards an empirical foundation for the use of equity weights in determining the social cost of carbon, with the implication that the price on greenhouse gas emissions should be higher due to the concern for distributional impacts.

CO2-Preis jetzt – sozialverträglich und verursachergerecht

Abstract The urgency of effective climate action measures and the practical experience in the context of the existing European Emissions Trading Scheme (ETS) are striking arguments for the introduction of uniform prices on CO₂ emissions: as a minimum price in the ETS and as a reform of existing tax rates on fossil fuels (CO₂ tax) for heating and transport (Non-ETS). In order for CO₂ pricing not to become a mere instrument of rising government revenues, the options currently under consideration are the counter-financing of existing taxes and levies that reduces electricity prices or a per capita refund (climate bonus) for households. Both result initially in very similar distributional effects: the lower the household income, the higher the initial financial relief. Compared to the counter-financing of the EEG levy, climate bonuses are expected to have stronger rebound effects and the reduction of bureaucracy and promotion of the efficient use of renewable energy in heating and transport (sector coupling) would be waived. Thus a counter-financing, in particular the EEG levy in order to lower electricity costs, is a priority. In order to adequately address social hardships, only few socio-political accompanying measures would be needed that are largely independent of the pricing mechanism.

European emission allowance and equity markets: evidence from further trading phases

PurposeThis paper aims to investigate the value relevance of the European Emission Allowance (EUA) return and volatility on the equity value of the top listed European Power Generation Firms for the three trading phases of the European Emission Trading Scheme.Design/methodology/approachThe authors use the multifactor financial market model over the period 2005-2016 on daily basis for the return relevance relationship, whereas time series models such as autoregression moving average and generalized autoregressive conditional heteroskedasticity are applied on a weighted average portfolio of the sample firms to test serial correlation and volatility of returns.FindingsThe findings are novel in which a positive and significant relevance of EUA return on equity return is shown; however, a vanishing effect is seen as one moves to further trading phases. Another remarkable finding is that the return relationship remains constant until a certain level in EUA price then inverts. Finally, the authors present that EUA is considered a systematic factor as firm and country-specific features are not statistically significant.Practical implicationsAt policy level, these findings signal policymakers for an appropriate design of the future trading phases in which they achieve the balance between public interests, as climate risk mitigation by reducing emissions, and the private interests of the market players to support innovative changes.Originality/valueTo the authors’ knowledge, this study would be the first to offer recent and comprehensive findings on the economic and financial implications of the European Emission Trading Scheme for the three trading phases. Additionally, the research offers time series robustness check besides the standard regression analysis and shows that there is an optimal EUA price that triggers polluters’ decision on emission and generation.

Outward Foreign Direct Investment Patterns of Italian Firms in the European Union's Emission Trading Scheme*

AbstractWe consider the role played by the European Union's Emissions Trading System (EU ETS) as a possible driver of outward foreign direct investment (FDI) for Italian manufacturing firms. Using a panel dataset of about 22,000 firms covering the first two phases of the EU ETS and the period before the EU ETS, we measure the patterns of FDI towards countries not covered by the EU ETS. The results show that the EU ETS had a weak effect on the number of new subsidiaries abroad (extensive margin), while it had a larger impact on production taking place in foreign subsidiaries (intensive margin), especially in trade‐intensive sectors.

Flobsion—Flexible Option with Benefit Sharing

Global environmental goals and the Paris agreement declared the need to avoid dangerous climate change by reducing emissions of greenhouse gases with an ultimate goal to transform today’s policies and reach climate neutrality before the end of the century. In the medium to long-term, climate policies imply rising CO 2 price and consequent financial risk for carbon-intensive producers. In this context, there is a need for tools to buffer CO 2 prices within the period of transition to greener technologies when the emission offsetting markets expose high volatility. Contracts for optional future purchase of carbon credits could provide emitters with a cost-efficient solution to address existing regulatory risks. At the same time, this would help to create much needed financing for the projects generating carbon credits in the future. This work presents the concept of a flobsion—a flexible option with benefit sharing—and demonstrates its advantages in terms of risk reduction for both seller and buyer as compared to both a “do nothing” strategy (offsetting at future market price) and a traditional option with a fixed strike price. The results are supported analytically and numerically, employing as a benchmark the dataset on historical CO 2 prices from the European Emission Trading Scheme. Flobsion has the potential to extend the traditional option in financial applications beyond compliance markets.

European Emission Allowance and the Equity Markets: Evidence from Further Trading Phases

Purpose - This study aims at investigating the value relevance of the European Emission Allowance (EUA) return and volatility on the equity value of the top listed European Power Generation Firms for the three trading phases of the European Emission Trading Scheme. Design/Methodology/Approach - We employ the multifactor financial market model over the period 2005-2016 on daily basis for the return relevance relationship, whereas time series models such as ARMA and GARCH are applied on a weighted average portfolio of the sample firms to test serial correlation and volatility of returns. Findings - Our findings are novel in which we show a positive and significant relevance of EUA return on equity return; however, a vanishing effect is seen as we move to further trading phases. Another remarkable finding is that the return relationship remains constant until a certain level in EUA price then inverts. Finally, we show that EUA is considered a systematic factor as firm and country specific features are not statistically significant. Originality/Value - To our knowledge, this study would be the first to offer recent and comprehensive findings on the economic and financial implications of the European Emission Trading Scheme for the three trading phases. Additionally, the research offers time series robustness check besides the standard regression analysis and shows that there is an optimal EUA price that triggers polluters’ decision on emission and generation.

EU ETS facets in the net: Structure and evolution of the EU ETS network

In this work, we investigate which countries have been more central during Phases I and II of the European Emission Trading Scheme (EU ETS) with respect to the different types of accounts operating in the system. We borrow a set of centrality measures from Network Theory's tools to describe how the structure of the system has evolved over time and to identify which countries have been in the core or in the periphery of the network. Performing partitions on the different types of accounts and transactions characterizing the EU ETS, we investigate whether intermediaries have affected the overall structure of the system. From the analysis of the European Union Transaction Log data over the period 2005–2012, we find that some national registries (France, Denmark, Germany, United Kingdom, The Netherlands) were much more central than others in the network. Empirical evidence, moreover, shows that some account holders strategically opened additional accounts in the more central registries, thus reinforcing their centrality in the network. Finally, it turns out that Person Holding Accounts (PHAs) have played a prominent role in the transaction of permits, heavily influencing the configuration of the system. This motivates further research on the impact of non-regulated entities in the EU ETS design.

Equilibrium prices and investment in electricity systems with CO2-emission trading and high shares of renewable energies

This paper couples two partial equilibrium models of the European electricity market to answer central questions regarding the decarbonisation of electricity systems, especially the interdependencies between the European emission trading scheme and subsidies for renewable energies. We analyse long-term development until 2050 with endogenous consideration of investment decisions in conventional power plants as well as renewable energy technologies. The paper answers central questions such as: can renewable energy sources cover their investment costs in an energy-only market with a sufficiently tight climate protection goal or do they need continuous subsidisation? How far (and how fast) will CO2 prices rise to achieve emission reduction targets of 80% until the year 2050? What is the effect of additional subsidies for renewable energy sources on electricity prices, system costs (costs to society), shares of renewables in the electricity system and climate protection?

Who opposes climate regulation? Business preferences for the European emission trading scheme

When do firms oppose international climate policy? Existing work often assumes that firms disapprove of climate regulation due to the immediate costs of compliance. We claim that if policy is implemented gradually, private preferences for climate policy vary as a function of its progressive stringency. That is, supportive views may rise in the initial phase of the policy, while opposing views may emerge as the policy becomes more stringent. We also argue that emissions of individual companies, as well as emissions levels in their respective sectors, influence corporate positions on these two dimensions. We test our argument with new corporate survey data on the European Union Emission Trading Scheme (EU ETS). We find that firms’ views on the performance of the EU ETS vary based on whether they concentrate on the policy’s current state or its future, more stringent development. Moreover, we find that individual firm and sectoral emissions correlate with support for the early-stage, more lenient version of the ETS, but that high-emission firms are more interested in disinvesting and relocating if the ETS becomes stricter. Our findings imply that both firm and sectoral organization can constrain environmental regulation, and that domestic compensation, especially at early stages, can have important effects on the continuity of climate policy.

Have Asian airlines caught up with European Airlines? A by-production efficiency analysis

This paper extends previous approaches to meta-efficiency measures by incorporating meta-frontiers using good-output, bad-output and by-production efficiencies to compare European and Asian airlines. We also examine whether the heterogeneity in environmental regulatory standards between these regions has emboldened Asian airlines to be less eco-friendly and/or more market-share seeking. We find that the environmental performance of European airlines improved continuously between 2007 and 2013, unlike their competitors in Asia. We argue that this improvement in the environmental performance of the European airlines could be an outcome of the European Emission Trading Scheme (ETS), which set incentives for European airlines to renew their fleets and optimise their operations. Our technological gap ratio estimates also point to some Asian airlines outperforming all other airlines on technological measures, indicating they operate in a more favourable business environment. Overall, our method contributes to the methodological enhancement of data envelopment analysis (DEA) and allows deeper insights into firm operations in general, and environmental efficiency analysis of European and Asian airlines in particular.

EU ETS revenues and member states investment strategies

This work investigates on how EU Member States spend their income coming from allowance auctioning within the European Emission Trading Scheme (EU ETS). After a brief overview of the principles of an ETS, the analysis focused on the design of an auctioning system. Subsequently, the EU ETS has been taken as practical instance to disentangle the implementation of an auctioning system within a functioning emission scheme. After this, I took the data on auctioning revenues from the EIONET database and deployed a detailed description of each Member State’s spending pattern. Furthermore, I asked each Member State to provide some further information on revenues spending. What emerged is that, in some cases, the data in the EIONET seem to comply with what disclosed by Member States. Yet, those further information shed clearer light on the matter..

Impacts of the Allocation Mechanism Under the Third Phase of the European Emission Trading Scheme

This paper focuses on the following two key research questions in the context of the change in allocation rules in the move from Phase I/II (2005–2012) to Phase III (2013–2020) of the European Emission Trading Scheme (EU ETS): First, how do allocations compare with actual installation-verified emissions in Phase III? For that purpose we analyse changes in sector-country allocations and verified emissions between Phase II and Phase III. The analysis is based on a selection of 2150 installations present in all phases of the EU ETS, taken from the European Union Transaction Log (EUTL) The results show that over-allocation has been considerably reduced in Phase III. Overall, allocation for the selected sectors decreased by 20% in 2013 compared to 2008 but varying across installations. Second, we investigate, whether the introduction of benchmarks in Phase III may have triggered carbon-reducing measures for industrial processes. For that purpose, we analyse for four product groups (cement clinker, pig iron, ammonia and nitric acid) the specific emissions (per tonne of product). Care was taken to define a data set with a similar delimitation of emission and production data. The findings were cross-checked through selected expert interviews. Our findings indicate that there is no evidence so far for improving specific emissions, though the strong improvement for nitric acid, as well as some improvement linked to ammonia occurring before the start of Phase III may have been supported by the introduction of Phase III.