European Emission Trading System Research Articles

Modeling the Nexus between European Carbon Emission Trading and Financial Market Returns: Practical Implications for Carbon Risk Reduction and Hedging

The carbon–financial nexus helps firms evaluate susceptibility to carbon risk more effectively. This is the first research article to model the short- and long-run co-integrating association between European financial markets, the CBOE oil price volatility index (OVZ) and the European carbon emission trading system (EU-ETS) by using the daily returns from 1 October 2013 to 1 October 2023. We utilize co-integration test followed by the ARDL framework with an error correction mechanism (ECM). Moreover, we utilize the DCC-GARCH-t copula framework to estimate the hedge ratio and to select an optimal portfolio weight for carbon risk hedging. Overall, the findings suggested that EU-ETS (OVZ) has a consistent positive (negative) short-term influence on all the equity returns of Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Spain and the stock indices of the whole Eurozone. However, in the long term, EU-ETS has a positive (negative) effect on the stock returns of France and the Eurozone (Belgium and Spain). Belgian and Spanish companies could implement long-term carbon reduction policies. Belgian and Spanish firms should focus on the utilization of green energy resources and the internalization of carbon emission-free mechanical processes as this may offer a safeguard against the additional pressure arising from escalating carbon prices. Finally, an optimal portfolio weight selection strategy based upon the DCC-GARCH-t copula approach aims for higher hedging effectiveness (HE) than the hedge ratio strategy when adopting short-term positions in Italian and Danish equity markets to reduce the risk of long-term EU-ETS volatility.

Heat Pump as an Emission Reduction Measure for Ships

Greenhouse gas regulations from the International Maritime Organization, such as the Carbon Intensity Indicator and the Energy Efficiency Existing Ship Index are drawing attention to the implementation of energy efficiency technologies in ships to lower emissions. Presently, more attention is paid to energy efficiency measures related to propulsion (e.g. speed management) and auxiliary energy use (e.g. onshore power). This study compares the environmental impact and cost of replacing heat pumps as an energy efficiency measure instead of oil-fired boilers for two case study vessels by comparing the life cycle impact of different strategies to fulfill the thermal load of vessels while at the port. In terms of life cycle emissions, the heat pump operated using onshore power has the potential to reduce global warming potential by 88% compared to an oil-fired boiler. This accounts for saving 3% and 8% of annual greenhouse gas emissions from entire ship operations, including emissions from engines for the respective case study ships. In addition, shifting to a heat pump avoids NOx and SOx emissions, which adversely affect air quality in the populated areas near the port. Cost results show that the heat pump has an overall higher cost of ownership for case study vessel 1 and a lower cost of ownership for case study vessel 2 compared to oil-fired boiler. Depending on the energy use of specific ships, heat pumps can be cost-competitive at existing carbon emission allowance prices (approximately 90€/tCO2) in the European emission trading system. For the assessed cases, with the emission trading scheme, the return on investment is less than six years and three years for case study vessels 1 and 2 respectively. The study also shows that operating a heat pump is more cost-effective than directly using electro-fuel in a boiler for thermal loads.

Assessment of the European Emissions Trading System’s Impact on Sustainable Development

This study explores the interaction between the emission trading system and the Sustainable Development Goals. Using an empirical analysis of a sample of European installations covered by the Emission Trading System from 2016 to 2021, we assessed how the system internalized the costs of carbon emissions across economic sectors and analyzed its impact on achieving the Sustainable Development Goals. The results revealed that while the increased efficiency of the emissions trading system had positive effects on environmental taxation and the reduction in economic losses due to climate change, challenges persist in natural resource use and energy dependence. This study offers new insight into the carbon ability pricing policies to properly allocate environmental costs. This study highlights the importance of integrating complementary policy instruments to strengthen effectiveness, given the link between the selected sustainable development and circular economy variables. The results provide stakeholders and policymakers with essential information for optimizing environmental policies and developing integrated approaches. If well implemented, such policies can effectively contribute to the fight against climate change and promote sustainable development by reducing social and environmental costs.

External Costs to Agriculture Associated with Further Open Pit Lignite Mining from the Bełchatów Deposit

The energy crisis in Europe and Poland caused by the conflict in Ukraine has renewed the debate in some countries about the wisdom of abandoning the use of local fossil fuels. The rise in gas and oil prices with little change in the cost of extracting lignite from open pit mines has led to a renewed consideration of lignite as the cheapest source of energy. This is not entirely true, as the level of costs at power plants ignores many external costs that are not included in the costs of energy producers, but are borne by the general public or other parties. One such cost is the external costs incurred by agriculture as a result of open pit lignite mining and the associated depression funnels. The Bełchatów lignite open pit is the deepest open pit in Europe and is expected to be in operation by 2038. The aim of the study was to assess the external costs that farmers will incur as a result of further open pit mining of brown call from the Bełchatów deposit, i.e., between 2023 and 2038 as well as in the 16-year extended period of restoration of water relations around the open pit. The decrease in crop yields and animal numbers was estimated in a comparative analysis, which compared changes in the yields of selected plants and animals in the area affected by the open pit to those in neighboring areas that were not affected. The analysis showed that the external costs to be borne by agriculture as a result of the further exploitation of the Bełchatów deposit will amount to an average of EUR 2.90 billion, and, depending on the calculation variant, from EUR 2.51 billion to EUR 3.14 billion. Including this amount in the cost of electricity production would result in an increase of EUR 9.11·MWh−1, which is 18.8% of the average wholesale price of electricity in Poland in 2017–2021. On the one hand, the increased consumption of lignite in electricity production, which is currently observed and may last for several years, may shorten the life of the open pit by up to 2 years. Shortening the mining period by one year, assuming that all the coal in the deposit is mined, will reduce the external costs for agriculture by about EUR 185 million, i.e., EUR 0.58·MWh−1. On the other hand, the increase in European Emissions Trading System (ETS) prices, the decrease in gas prices and the increase in energy production from renewable energy source (RES) will make lignite power generation profitable only during the periods with the highest prices, so that by 2038 lignite will not be mined in its entirety. Every 10 Gg of coal that will not be mined by 2038 will result in an increase in external costs in agriculture per MWh of EUR 0.23·MWh−1.

Carbon trading and COVID-19: a hybrid machine learning approach for international carbon price forecasting.

Accurate carbon price forecasting can better allocate carbon emissions and thus ensure a balance between economic development and potential climate impacts. In this paper, we propose a new two-stage framework based on processes of decomposition and re-estimation to forecast prices across international carbon markets. We focus on the Emissions Trading System (ETS) in the EU, as well as the five main pilot schemes in China, spanning the period from May 2014 to January 2022. In this way, the raw carbon prices are first separated into multiple sub-factors and then reconstructed into factors of 'trend' and 'period' with the use of Singular Spectrum Analysis (SSA). Once the subsequences have been thus decomposed, we further apply six machine learning and deep learning methods, allowing the data to be assembled and thus facilitating the prediction of the final carbon price values. We find that from amongst these machine learning models, the Support vector regression (SSA-SVR) and Least squares support vector regression (SSA-LSSVR) stand out in terms of performance for the prediction of carbon prices in both the European ETS and equivalent models in China. Another interesting finding to come out of our experiments is that the sophisticated algorithms are far from being the best performing models in the prediction of carbon prices. Even after accounting for the impacts of the COVID-19 pandemic and other macro-economic variables, as well as the prices of other energy sources, our framework still works effectively.

Current and future protection against carbon leakage in the European Emissions Trading System

With the Fit for 55 package, the European Commission has proposed a comprehensive reform of the European Emissions Trading System and the introduction of a Carbon Border Adjustment Mechanism (CBAM). A key element of this is the switch of carbon leakage protection from free allocation and electricity price compensation to CO2 pricing of imported goods and greater support for technological innovation in the CBAM sectors (aluminum, cement, electricity, fertilizer, iron, steel, and hydrogen). Whether this new approach will be able to prevail in the face of the immense subsidy approach through the Inflation Reduction Act in the US remains to be seen.

Over-allocation in the European Emission Trading System

Over-allocation in the European Emission Trading System

Optimal carbon taxation in EU frontrunner countries: coordinating with the EU ETS and addressing leakage

ABSTRACT Several EU countries have targets for the reduction of CO2e emissions that go beyond the target set by the EU. We study what would be the optimal carbon tax policy in such EU frontrunner countries, focusing on two questions: 1) How should national climate policy be coordinated with the European Emissions Trading System (ETS), and 2) How should an EU frontrunner country address the risk of carbon leakage? We show that these issues are closely linked and that the answers to the two questions depend on the following factors: i) The shadow cost assigned to carbon leakage, ii) The rates of carbon leakage in the ETS and non-ETS sectors, and iii) The price of ETS emission allowances relative to the domestic marginal abatement cost of attaining the desired reduction of domestic emissions. Our analysis shows that it is preferable for an EU frontrunner country to implement a national ETS sector carbon tax that results in a higher total carbon price in the national ETS sector compared to the national non-ETS sector. We illustrate how our theoretical model can be combined with a modified version of the GTAP-E general equilibrium model of the world economy to estimate the parameters of the optimal national carbon tax scheme in an EU frontrunner country, using Denmark as an example. We find that the ETS sector should pay a total carbon price that is between 33 and 78 percent above that of the rest of the economy depending on the aversion to carbon leakage. Key policy insights It is generally optimal for an EU frontrunner country – one with a domestic emission target beyond that set by the EU – to implement a national ETS sector tax. The total national carbon price should be higher in the ETS sector compared to the non-ETS sector. Data for Denmark indicate that the total national ETS sector carbon price should be at least 33 percent higher than that of the national non-ETS sector.

CURRENT CLIMATE POLICY OF GERMANY

The article is deals with the German policy aimed at reducing greenhouse gases emission. The author analyses the way current measures correspond with «Klimaschutzprogramm 2030» adopted in 2019. The paper pays special attention to theoretical provisions as well as practical decisions. The author also examines the contribution of the European Emissions Trading System to the German climate actions, as well as the adoption of the national system. In addition, the article concentrates on the amendments to the Renewable Energy Law (EEG) as well as the establishment of new construction standards and the experiment in paying for public transport. The study revealed that current German political steps redistribute the financial burden on the consumers, with the support measures for green energy being changed. The conclusions are important for understanding the further development of the German climate policy influencing the economy and foreign trade of the nation.

Synthetic control methods for policy analysis: Evaluating the effect of the European Emission Trading System on aviation supply

In this paper, we provide a novel application of synthetic control methods by offering two major modifications to the existing methodological framework. We provide the first complete ex-post evaluation of the causal impact of carbon pricing on aviation supply, expressed in terms of airline output (i.e., number of seats supplied at the airline-route level). We investigated the policy change in the European Union Emission Trading System (EU ETS), the first large greenhouse gas emissions trading scheme in the world. We distinguish between low-cost, regional and full service airlines, short and medium/long-haul routes, routes towards (or from) hub airports versus non-hub airports, monopolistic versus non-monopolistic routes. The analysis shows that the EU ETS does not have a substantial impact on the average aircraft size, while it has caused a reduction of total airline seat capacity and flight frequency, with the percentage of airline seat capacity reduction reaching above 20% at its peak. The overall effect of the policy has a remarkable impact on low-cost and regional airlines, short-haul routes, spoke–spoke markets and monopolistic routes. Our results are the first empirical confirmation to the theoretical prediction in the aviation literature that emission charges will reduce flight frequency and increase load factors while having no effect on aircraft size.

The European Union's CBAM as a de facto Climate Club: The Governance Challenges

The European Commission has announced far-reaching reforms to accelerate the reduction of greenhouse gas emissions. Among the proposals constituting the European Green Deal is the adoption of a Carbon Border Adjustment Mechanism (CBAM) to prevent carbon leakage. In practice, however, CBAM will not only act as a shield for the European Emissions Trading System (ETS) but also incentivize other countries to implement compatible carbon pricing schemes. We argue that the EU's CBAM thus de facto has the features of a climate club, but the current proposals and debate do not address how the club would be governed. While the literature focuses on legal and economic aspects of CBAM design, there is little debate about the governance challenges it entails. We identify two major challenges. CBAM will put pressure on trade partners to introduce carbon pricing and/or bring it into line with the price of EU ETS allowances. However, the future availability and thus price of ETS allowances is determined within the EU. Secondly, the method for calculating embedded carbon is left to the discretion of the European Commission. EU policymakers need to acknowledge the challenges that follow from setting up a de facto climate club, and that addressing them involves a trade-off between maintaining control over the direction and ambition of climate policy and CBAM's legitimacy.

Biomethane from Manure, Agricultural Residues and Biowaste—GHG Mitigation Potential from Residue-Based Biomethane in the European Transport Sector

Biomethane from manure, agricultural residues, and biowaste has been prioritized by many energy strategies as a sustainable way to decrease greenhouse gas (GHG) emissions in the transport sector. The technology is regarded as mature; however, its implementation is still at an early stage. At EU level, there are currently two major instruments relevant for promoting the production of biomethane from waste and residues and which are likely to contribute to unlocking unused GHG mitigation potentials: the Renewable Energy Directive 2018/2001 (RED II) and the European Emission Trading System (EU ETS). Our study analyzes the effects of these two instruments on the competitiveness of biomethane as an advanced transport fuel in relation to different policy scenarios within the RED II framework and under EU ETS conditions. Within the RED II market framework for advanced biofuels, biomethane concepts that use manure as a substrate or as a cosubstrate show significantly lower GHG mitigation costs compared to advanced biofuels. With respect to the current EU ETS conditions for bioenergy, it is helpful to consider the GHG reduction potential from the non-ETS agricultural sector as a way to unlock unused potential for reducing GHG emissions.

Impact of political and market-based measures on aviation emissions and passenger behaviors (a Swiss case study)

The global aviation industry has been increasingly urged to reduce their CO2 emissions. To achieve this, the International Air Transport Association (IATA) and International Civil Aviation Organization (ICAO) have successfully adopted various operational, technological, and air traffic management/infrastructural measures. However, they have also implemented market-based regulatory measures, including the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Additionally, regional measures, such as the Europeanemission trading system (ETS), nationwide political measures, such as flight taxes, and compensation programs by airlines also exist. Therefore, this study surveyed the impact of such measures, primarily on business travelers and their behavior, with a focus on Switzerland. Additionally, not only the impact of the first-last mile (airport access) was discussed, but also intermodal aspects like high-speed rails were debated. Results indicated that flight tax programs were found to have a weak impact on demand. The impact of COVID-19 was addressed and decreased travel frequency from COVID-19 may impact global flight emissions in the long term. Furthermore, passengers supported investments of flight-tax revenues in sustainable aviation technology; they did not support flight contingents. Conclusions are that taxes might generate additional airport traffic. An analysis about booking behaviors revealed fundamental differences in environmental terms. Finally, voluntary compensation was highly favored.

A European Emissions Trading System Powered by Distributed Ledger Technology: An Evaluation Framework

The European Union Emissions Trading System (EU ETS) is a major pillar of the European energy policy to reduce greenhouse gas emissions. However, the reportedly pervasive frauds in this market are constraining the beneficial role of the EU ETS. In this conceptual paper, we propose to digitalize the EU ETS by distributed ledger technology (DLT), enabling the verification of authenticity and provenance, proof of ownership, and lifecycle traceability of carbon certificates and assets. Our platform allows verifiable credentials to validate emission allowances, real-time tracking of trading participants’ emissions, and the audit trail reporting of the decentralized trading records. Furthermore, we complement the DLT application concept with a structured interdisciplinary evaluation framework. Our framework and analysis aim to stimulate further interdisciplinary research in this area to support regulators, such as the European Commission, in designing effective digital emissions trading systems.

The Effect of Changing Marginal-Cost to Physical-Order Dispatch in the Power Sector

The analysis of local environmental policies is essential when evaluating the consistency of national public policies vis-a-vis the compliance of global agreements to reduce climate change. This study explores one of these policies; the 2021 Mexican reform to change electric power dispatch from a marginal-cost-based to a command and control physical system prioritizing power generation from the state power company. The new law forces the dispatch of the state company power facilities before private power producers. We use the GENeSYS-MOD techno-economic model to determine the reform’s effect on the power system’s generation mix, cost structure, and anthropogenic emissions. For this, we optimize the model under three distinct scenarios; a business-as-usual scenario with no changes to the merit order, a model with the new physical order dispatch, and an additional case where in addition to the shift to the physical dispatch, we reduce the price of fuel oil below natural gas prices to simulate the current behavior of the power company. It is relevant to note that we optimize the energy system without any assumption regarding renewable targets or climate goals because of political uncertainty and the need of pinpoint the effect of the merit order change while avoiding possible variations in the state-space arising from other constraints. Our results show that by 2050, the new dispatch rule increases the market power of the state company to 99% of total generation and decreases the share of renewable technologies in the generation mix from 72% to 51%. Additionally, cumulative power sector emissions increase by 563 Megatons of CO2, which with the current cost of carbon in the European Emissions Trading System translates to around 36 billion Euros

Hedging and temporal permit issuances in cap-and-trade programs: The Market Stability Reserve under risk aversion

Cap-and-trade programs such as the European Union's Emissions Trading System (EU ETS) expose firms to considerable risks, to which the firms can respond with hedging. We develop an intertemporal stochastic equilibrium model to analyze the implications of hedging by risk-averse firms. We show that the resulting time-varying risk premium depends on the size of the permit bank. Applying the model to the EU ETS, we find that hedging can lead to a U-shaped price path, because prices initially fall due to negative risk premiums and then rise as the hedging demand declines. The Market Stability Reserve (MSR) reduces the permit bank and thus, increases the hedging value of the permits. This offers an explanation for the recent price hike, but also implies that prices may decline in the future due to more negative risk premiums. In addition, we find higher permit cancellations through the MSR than previous analyses, which do not account for hedging.

Оцінки контрольних показників викидів парникових газів в електроенергетиці для системи торгівлі квотами на викиди в Україні

This article presents the application of benchmarks of greenhouse gas emission for free allocations between installations (plants) in the promising emission trading system in Ukraine. The basic concepts and definitions, as well as the principles of approach applied to the development of benchmarks are presented. The summarized data on the calculated values of benchmarks in comparison with values that are accepted now in the European emission trading system are resulted. Certain differences in the construction and application of benchmarks in Ukraine and the EU, caused by the structure and state of economy, as well as the characteristics of the industries covered by the system are analyzed. Certain limitations are specified, first of all in the presence of required basic data which cause the necessity of recalculation. We performed an assessment of the introduction of free allocation for greenhouse gas emissions in the production of electricity at coal-fired power plants in Ukraine with using specific CO2 emission factors. The calculations were carried out under the condition of technical re-equipment of thermal power units with increase in their efficiency and under the condition of absence of re-equipment. We also compared the estimates obtained on the basis of a predetermined emission control indicator for coal-fired power plants with the European level and calculated the volume of free allocation of quotas for Ukrainian thermal power plants based on the results of their activities. Keywords: benchmarks, allocations, electricity, heat, emissions trading system

Rethinking the Applicability of Emission Trading System in ASEAN: Lesson from the European Emission Trading System

AbstrakPerdagangan karbon adalah masalah universal yang dapat dipraktikkan di setiap negara, termasuk di kawasan seperti Uni Eropa. Uni Eropa adalah satu-satunya organisasi regional yang berpartisipasi sebagai pihak dalam United Nations Framework Convention on Climate Change (UNFCCC). Sejauh ini Uni Eropa telah membentuk kerangka hukum yang paling ambisius untuk pengurangan emisi karbon di dunia. ASEAN sebagai asosiasi perkumplan negara-negara di Asia Tenggara dengan tingkat emisi yang cukup tinggi, baik dari kegiatan berbasis industri maupun aktifitas di darat belum menunjukkan kerjasama jual beli karbon antar anggota ASEAN seperti yang telah dlakukan oleh Uni Eropa. Apakah ASEAN memiliki skema perdagan emisi tersendiri atau ada kema lain yang dapat dicontoh seperti yang terjadi di wilayah Uni Eropa.Kata kunci: Perdagangan Karbon; Uni Eropa; ASEAN; Perubahan Iklim

Markov-switching dependence between artificial intelligence and carbon price: The role of policy uncertainty in the era of the 4th industrial revolution and the effect of COVID-19 pandemic

This paper investigates the dependence structure and dynamics between artificial intelligence (AI) and carbon prices in the era of the 4th industrial revolution. Using the NASDAQ AI price index as a measure of AI and the European Energy Exchange EU emissions trading system (i.e. certificate prices for CO2 emissions) as a measure of carbon prices, we employ time-varying Markov switching copula models from December 2017 to July 2020 that provide evidence of a time-varying Markov tail dependence structure and dynamics between AI and carbon prices. The result shows a negative dependence structure for the return series between AI and carbon prices. However, the relationship is asymmetric, indicating that there is a stronger tail dependence in the lower tails instead of the upper tails. The finding implies that AI is a favourable hedge against carbon prices, therefore indicating the diversification benefits of AI. To understand the issue in detail, we examine the effect of economic policy uncertainty, equity market volatility, and the recent COVID-19 pandemic; we find their negative effect on the dynamic dependence structure between AI and carbon prices at lower and higher quantiles. This evidence offers additional support for the safe-haven ability of AI for carbon prices.

The 2018 Reform of EU ETS: Consequences for Project Appraisal

The European Union's Emissions Trading System is the largest system in the world for trade in greenhouse gases. It used to be a cap-and-trade scheme with a fixed supply of permits. However, a recent reform of the system punctures the waterbed by making the supply of permits endogenous. The current paper discusses how to handle permits in economic evaluations. It considers both schemes with a fixed cap and schemes with an endogenous cap. The paper also derives a rule when the project causes an induced intertemporal change in the supply of permits under an endogenous cap. An induced reduction in emissions, what we term a multiplier, is associated with benefits but comes at a cost as production is displaced when the number of available permits decreases. The permit multiplier implies that emissions within the EU ETS are valued differently from emissions occurring elsewhere even under an endogenous cap. A further novel result is that an endogenous cap could increase the social profitability of abatement efforts. By replacing purchases of permits, abatement could cause a reduction in the endogenous supply of permits and hence emissions.