European Union Carbon Research Articles

Global spillovers of US climate policy risk: Evidence from EU carbon emissions futures

International climate policy risk spillovers occur when expected changes to climate policy stringency in one country affect expected climate policy stringency in another country. We develop an event study procedure to identify such spillovers in emissions trading systems, specifically examining the impact from the United States (US) to the European Union (EU). Distinguishing between policy events likely to reduce US commitment to climate action (‘brown events’) and those likely to increase it (‘green events’), we find that the average brown US policy event is associated with an anticipated increase in future EU carbon permit supply, leading to a cumulative 7.1% drop in EU carbon prices over the event window. Conversely, green US policy events are linked to an expected decrease in future EU permit supply, resulting in a cumulative 4.7% rise in EU carbon prices. These findings suggest that financial markets anticipate EU regulators to align with the direction of US climate policy. Our results underscore the significance of regulatory risk spillovers in global climate policy coordination.

A dynamic multi-objective optimization model for inner-industry carbon responsibility allocation based on carbon tax and carbon offsets accounting

The setting of Intergovernmental Panel on Climate Change (IPCC) raises concerns on curbing the excessive carbon emissions, and European Union (EU) has been proactively attempting “green” initiatives striving to achieve carbon neutrality. The current Carbon Border Adjustment Mechanism (CBAM) only works on short-term carbon reduction without much “greenness” investment incentives so far, and few studies focus on the long-standing inner-industrial carbon reduction coordination. To address these issues, this paper creatively presents a dynamic multi-objective carbon responsibility allocation model (CRAM) for EU carbon market, allows the carbon trade with a taxation based on carbon offsets accounting, and considers the final targets of sustainable “greenness” investment incentives. To find the optimal results of the designed dynamic CRAM, an improved KT-NSGA-II algorithm is proposed to detect the Pareto frontiers of each successive periods. Data from EU Cement and Aluminium industries are then selected for empirical analysis to compare the proposed CRAM to conventional CBAM model. The findings demonstrate that the superiority of CRAM in carbon emissions reduction, economic benefits improvement and green invests encouragement. With the adjustment of the inner-industrial carbon allowance trade, total carbon emissions decreased by 28.03% and the “greenness” investment initiative increased by 39.24% in contrast to the CBAM. The sensitivity analysis of the model also provides suggestions on the settings of carbon quota and tax with different industrial production process, and proposes policy recommendations for CRAM implementation.

The asymmetric correlation and causality between the European Union carbon market and fossil energy markets caused by COVID-19

The carbon and fossil energy markets have been significantly affected by the COVID-19 pandemic. This article examines the nonlinear correlation and the spillover effect between the global fossil energy markets and the European Union carbon market prior to and following COVID-19. The nonlinear correlation is captured by the localized Gaussian correlation approach, and the spillover effect is evaluated using a quantile-based Granger causality analysis method. Empirical evidence demonstrates that COVID-19 strengthens the correlation between the carbon and oil markets. Conversely, the correlation between the carbon and coal markets is weakened by COVID-19. Furthermore, COVID-19 only resulted in the contagion between the carbon and Texas gas markets. Finally, the spillover effect between the European Union carbon market and fossil energy markets changes from unidirectional to bidirectional. This article provides inspiration for investors to adjust their portfolios to reduce investment risks and meaningful information for policymakers to maintain market stability.

Equilibrium bifurcation and extreme risk in the EU carbon futures market

Considering the long-term memory and volatility clustering of the European Union (EU) Carbon Emission Allowances (EUA) futures returns, based on the economy–energy–environment system perspective and the assumption of investors' heterogeneity, this study proposes a joint modeling approach combining the fractionally integrated generalized autoregressive conditional heteroscedasticity model (FIGARCH) and the stochastic cusp catastrophe model (SCC) to examine the equilibrium bifurcations and extreme risks in the EU carbon futures market. The relevant results are threefold. (1) The SCC model has good fitting effect and interpretability, and is an effective method for investigating catastrophe reactions under time-varying volatility conditions. (2) In the EUA futures market, chartists are mainly affected by short-term price and trading volume changes, which leads to the emergence of equilibrium bifurcations, while fundamentalists make investment decisions based on the economy, the energy market, and market supply–demand, which affects the asymmetry of equilibrium bifurcations. (3) Using the catastrophe criterion (i.e., Cardan's discriminant of the equilibrium surface equation), we identify148 equilibrium bifurcation time points in the EUA futures market from December 3, 2009 to September 16, 2020, most of which are concentrated in two upward periods with an average scale of extreme risks is about 32.51 %. Our analysis provides theoretical support for regulatory authorities to stabilize the carbon futures market and build a collaborative extreme risk management framework covering energy and macroeconomics, also proposing suggestions for traders to effectively prevent extreme risks.

ელექტრული ავტოტრანსპორტის განვითარების ტენდენციები მსოფლიოსა და საქართველოში

The intensive growth of the global vehicle fleet and environmental pollution caused by harmful emissions from vehicles have become one of the global environmental problems. In addition to that, oil prices are continuing to rise. A radical way to solve the problems of environmental safety and fuel efficiency of cars is to use electric current as an energy source in a car. The complete replacement of the internal combustion engine with an electric motor – in electric cars or a combination of the two – in hybrid cars completely eliminates or significantly reduces fuel consumption and harmful emissions. Electric cars are replacing cars with internal combustion engines from all dynamically developing world markets. Replacing cars with internal combustion engines with electric ones is especially important for Georgia, where almost 100% of natural gas and oil products are imported and road transport accounts for the largest share of environmental pollution, especially in cities. The country has the potential to create significant additional energy capacity for electric vehicles. Georgia aims to become a regional leader in clean energy consumption – a “green” country and ensure compatibility with the European Union's carbon neutrality goal by 2050, in which electric vehicles play an important role.

Could the EU carbon border adjustment mechanism promote climate mitigation? An economy-wide analysis

Due to concerns about carbon leakage and sectoral competitiveness, the European Union (EU) proposed implementing the carbon border adjustment mechanism (CBAM). The effectiveness and potential negative consequences of CBAM have aroused extensive discussion. From the perspective of the economy-wide analysis, this study uses a global computable general equilibrium model to explore the rationality of CBAM from the aspects of socioeconomic impact and the effects of promoting climate mitigation. Furthermore, the potential alternative mechanism of CBAM is proposed. The results show that CBAM can reduce the EU's gross domestic product (GDP) loss; however, the GDP loss in all other regions increases. Moreover, CBAM raises household welfare losses in most regions, including the EU. Second, although CBAM can reduce the marginal abatement cost in eight regions, it comes at the cost of greater economic losses. Furthermore, the economic and household welfare cost of raising emissions reduction targets in regions like the USA and Japan is substantially higher than the impact of passively accepting the CBAM; therefore, CBAM's ability to drive ambitious emission reduction initiatives may be limited. Finally, for the potential alternative mechanism, from the perspective of reducing economic cost and household welfare losses, the EU could implement domestic tax cuts in the short-term and promote global unified carbon pricing in the long-term.

The rebound effect of material and energy efficiency for the EU and its major trading partners

This study presents a comprehensive analysis and comparison of material and energy efficiency performances and their rebound effects, providing insights into their implications for sustainability and climate change policies. Using Stochastic Frontier Analysis (SFA), we examine material and energy efficiency scores and rebound effects in the European Union (EU) member countries and their major trading partners from 1995 to 2019. Our findings reveal several key insights. Firstly, developed EU countries and affluent trading partners exhibit higher material and energy efficiency scores, while less developed members and partners rank lower. The study highlights the potential implications of the EU's Carbon Border Adjustment Mechanism (CBAM) for low-efficiency trading partners, which may face substantial penalties and be incentivized to take significant steps to enhance material and energy efficiency. Secondly, a positive correlation is observed between efficiency improvements and rebound effects, suggesting that policymakers should take the rebound issue seriously. Thirdly, while energy efficiency scores are relatively higher, material efficiency performances are lower and improving over the years. Finally, the rebound effects of energy efficiency exceed those of material efficiency, implying that energy reduction potentials are largely offset. Therefore, prioritizing material consumption for environmental sustainability becomes crucial due to the significant potential for improvement with lower rebound effects.

The development, changes and responses of the European Union carbon border adjustment mechanism in the context of global energy transition

Energy production and consumption is the primary source of global carbon emissions. In order to achieve the goal of Intended Nationally Determined Contributions (INDCs) in the Paris Agreement, countries around the world have set off an upsurge of energy transition. The EU has ambitious INDCs. The Energy crisis has made it accelerate the energy transition, thus promoting the development of its circular economy. However, the EU focuses on carbon leakage during this process. To address this issue and maintain the competitiveness of EU industries during the transition, the EU proposed the Carbon Border Adjustment Mechanism (CBAM). The EU proposed the background and development process of the CBAM, and organized the core content of the tripartite plan and final bill of the European Commission, European Parliament, and European Council. What's more, the framework system of the CBAM is clarified, and further analysis is conducted on the future development of CBAM of the EU based on various factors. In response to the new development of the CBAM, it is suggested that developing countries should adhere to the principle of common but differentiated responsibilities on the international front and attempt to build and improve a carbon market system to partially offset carbon tariffs. Finally, we should strengthen the research on the response plan of the EU CBAM and establish an effective communication mechanism with the EU, in order to better cope with the impact of the CBAM on the trade of developing countries in the future.

Carbon farming, overestimated negative emissions and the limits to emissions trading in land-use governance: the EU carbon removal certification proposal

This article conducts a qualitative governance analysis of the European Commission’s 2022 proposal for a certification framework for carbon removals (CRCF). It highlights potential challenges and legal implications—with a specific focus on carbon farming. While the European Union (EU) acknowledges carbon farming as an important strategy to offset residual emissions, such carbon removal activities are prone to reversals and models often overestimate their sequestration potential. The CRCF aims to account for these issues, but the analysis shows that the proposal may, in part, undermine international climate and biodiversity goals set by the Paris Agreement and the Convention on Biological Diversity. Key concerns include its failure to consider the normative hierarchy between emission reductions and removals mandated by EU and international law, the introduction of a temporary removal crediting system, the extensive delegation of powers to the Commission, the possibility that it may incentivise shifting effects, and its lack of alignment with other EU environmental policies. Additionally, the CRCF’s failure to restrict the use of carbon credits after certification increases the risk of double claiming of removal activities—and the proposal may open the door for to future integration of carbon removals into the EU’s emission trading scheme, which should be avoided for various reasons. As an alternative, member states should consider targeted subsidy schemes and regulatory instruments to navigate these challenges in carbon farming effectively.

Impacts of Carbon Border Adjustment Mechanism on the Development of Chinese Steel Enterprises and Government Management Decisions: A Tripartite Evolutionary Game Analysis

Upon the implementation of the European Union Carbon Border Adjustment Mechanism (CBAM), substantial challenges are anticipated to impact the international trade of Chinese steel products. To safeguard the competitiveness of Chinese steel products on the global stage, this paper establishes a tripartite evolutionary game model, involving large steel enterprises, small- and medium-sized steel enterprises, and the government. The model integrates collaborative emission reduction and free-riding benefits among enterprises, along with the government’s dynamic subsidies and penalties. First, we calculate the replicator dynamic equations and conduct stability analysis to obtain the evolutionary trends and system equilibrium points in different phases of the CBAM. Then, we validate the evolutionary theoretical analysis of the model through example simulation analysis. Finally, we explore the impact of different parameters on the agents through a sensitivity analysis of parameters. The findings indicate that (1) large enterprises demonstrate greater sensitivity to CBAM, making their production structures more susceptible to changes in CBAM policies; (2) small- and medium-sized enterprises are more prone to free-riding behavior influence; (3) government intervention should be kept within appropriate boundaries, as excessive intervention may lead to strategic oscillation, with passive management being chosen by the government during the strengthening phase of CBAM; (4) elevating the price in the Chinese carbon market would slow down the structural changes in the production of Chinese steel enterprises, serving as an effective measure to counteract the impacts of CBAM. This paper provides theoretical support for how steel enterprises and the government can respond to CBAM, aiding stakeholders in selecting optimal strategies during different implementation stages and mitigating the impacts of the CBAM to the maximum extent possible.

Analysis of the Potential Impact of the EU Carbon Border Adjustment Mechanism on China

Excessive carbon dioxide emissions are one of the major causes of global warming. To effectively respond to global climate change, all countries are making efforts and changes in this regard. As one of the largest carbon markets in the world, the European Union (EU), to better respond to the Paris Agreement, introduced the European Green Deal and the EU Carbon Border Adjustment Mechanism (CBAM). The mechanism requires that high-carbon products imported into or exported from the EU pay a corresponding amount of tax or refund the corresponding carbon emission allowances. The implementation of the EU Carbon Border Adjustment Mechanism (CBAM), which is essentially a carbon tariff, has also had a significant impact on the Chinese market. The more carbon-intensive steel industry has been the first to be hit, affecting the competitiveness of the industry's exports in the EU to a certain extent, while also increasing compliance costs for the development of other related industries. Chinese enterprises should strengthen innovation and research, and actively introduce low-carbon technologies. At the same time, China should continue to improve its own voice and accelerate the construction of the national carbon market.

An Impact Assessment of the European Carbon Border Adjustment Mechanism (CBAM) on the Korean Economy: A CGE Approach

Purpose - This paper investigates the economic impact of the European Union Carbon Border Adjustment Mechanism (EU-CBAM) on Korea’s economy.
 Design/Methodology/Approach - The study employs the input-output model and Global Trade Analysis Project-Energy (GTAP-E) model by McDougal and Golub (2007), along with the GTAP-E version 10.1 Data Base developed by Aguiar et al. (2019). The input-output model estimates the carbon emissions of Korea’s exports to the EU27, evaluating potential carbon costs and a carbon tax (measured in US dollars per ton of emissions). Utilizing the static GTAP-E model, three policy scenarios are implemented, focusing on direct carbon emissions (Scope 1), emissions from electricity usage (Scope 2), and indirect emissions (Scope 3).
 Findings - Simulation outcomes reveal significant contractions in CBAM-related sectors of the Korean economy, with a decline in iron and steel production (US$ 68.00 million) and electronic industries (US$ 39.16 million). Korea’s export reductions to the EU27 in CBAM-affected sectors (iron and steel, cement, aluminum) indicate a subtle impact extending to the energy, energy-intensive, and services sectors.
 Research Implications - This paper provides valuable insights to policymakers and entrepreneurs in navigating the challenges and opportunities arising from the interlinkage of environmental policies and global trade dynamism. The analysis contributes to discerning perspectives essential for informed decision-making amid the complex interplay of regulatory frameworks and international trade dynamics.

Implications of the Carbon Border Adjustment Mechanism on South Korean industries: Challenges and policy recommendations

This study examines the effects of the European Union's Carbon Border Adjustment Mechanism (CBAM) on South Korean industries. Concerns about carbon leakage, where carbon emissions increase in countries or regions with less stringent climate policies, have grown recently. Specifically, firms strategically relocate their operations to countries with lower carbon costs, where they can produce goods more cheaply and without carbon constraints. CBAM is a carbon tariff on carbon intensive products imported by the European Union. While the CBAM has the potential to reduce global carbon emissions, it poses significant risks to South Korea, which relies heavily on exports of CBAM-affected products. This study provides an overview of the potential effects of the CBAM on industries in South Korea, applies event study analysis to quantitatively evaluate how the financial market has reacted to CBAM-related events. Based on the research findings, as the details of CBAM become clearer, there is a shift in perception from environmental goals to broader issues across industries. Building on this understanding, we discuss issues related to the CBAM enactment: firm-level carbon accounting, EC-certified accreditation institutions, and the carbon allowance price gap between the EU and South Korea. We propose necessary short-term and long-term policies to attenuate CBAM-related risks.

The role of environmental technologies, institutional quality, and globalization on environmental sustainability in European Union countries: new evidence from advanced panel data estimations

Factors such as investments in environmentally clean technologies, globalization, and institutional quality significantly increase environmental quality. The study aims to provide light on how environmental technologies, institutional quality, globalization, and economic growth affect a sustainable environment. In addition, this study evaluates the European Union’s carbon zero target by 2050 and the results of achieving carbon neutrality by 2030, which was put on the agenda at the UN Climate Change Conference of the Parties (COP-26). For this purpose, ten countries (Germany, Austria, Denmark, Finland, France, Netherlands, Spain, Italy, Sweden, and Switzerland) that invest in the highest environmental technology in the European Union were selected in the study. The data range of the study is from 1990 to 2019. Also, the validity of the load capacity curve (LCC) hypothesis was investigated in these countries. The CCEMG and DCCE estimators were used to estimate long-run coefficients. When the panel was assessed as a whole, the LCC hypothesis was determined to be valid by both estimators. According to country-based results, it has been determined that the LCC hypothesis is valid only for Spain. The study also includes the following observations. (i) Environmental technologies increase LCF for Austria, improving environmental quality. (ii) Globalization reduces LCF for Austria. (iii) Institutional quality variable decreases LCF for Austria and increases LCF for Germany and France. These findings suggest that to attain a sustainable environment in the future, policymakers should raise research and development budgets for environmental technology, enhance the standards of institutions, and take globalization into account.Graphical abstract

Analyzing the impact of resource productivity, energy productivity, and renewable energy consumption on environmental quality in EU countries: The moderating role of productivity

One of the requirements for guaranteeing environmental sustainability is lowering the proportion of non-renewable energy in energy consumption and raising the balance of renewable energy. Factors like resource productivity, renewable energy consumption, and energy productivity are necessary to mitigate environmental deterioration. However, there has yet to be much research done in the current literature on the impact that resource productivity, energy productivity, and renewable energy consumption play in reducing environmental deterioration. This study aims to reach Sustainable Development Goals 7 and 12, which address a clean environment. For this purpose, the impact of resource efficiency, energy efficiency, and renewable energy on environmental quality was investigated for selected EU countries, namely the Czech Republic, Greece, Belgium, Italy, Denmark, Malta, Portugal, Slovenia, Spain, Cyprus, Netherlands, France, Luxembourg, Germany, Austria, Slovakia, Croatia, and Poland. This research also assesses the results of achieving carbon neutrality by 2030, a goal set at the UN Climate Change Conference of the Parties (COP-26), and the European Union's carbon zero objectives by 2050. The present study's data spans from 2000 to 2019. Two distinct estimators (CCEMG and AMG) were used to estimate long-run coefficients. When the panel is analyzed as a whole, economic growth reducesthe load capacity factor (LCF), according to both estimators. Only for Luxembourg does economic growth result in a rise in LCF, per findings by the nations. The study makes the following points: (i) Using renewable energy raises LCF in Malta and Spain. Energy productivity boosts LCF in the Czech Republic, Austria, and Poland. (iii) In Cyprus and Poland, resource productivity increases LCF. Ultimately, the paper discusses the policy ramifications for preserving a sustainable ecosystem.

Forecasting carbon price using signal processing technology and extreme gradient boosting optimized by the whale optimization algorithm

AbstractPredicting carbon prices is crucial for the growth of China's carbon trading industry. This paper proposes a residual correction model that considers multiple influencing factors. First, the best historical data and main external factors input by the model are determined by using the partial autocorrelation function and Spearman correlation analysis, and the carbon price forecasting index system is constructed. Second, the whale optimization algorithm (WOA) is utilized to determine the optimal parameters of the extreme gradient boosting (XGBoost), and the WOA‐XGBoost model is built to perform preliminary carbon price forecasts and obtain the residual series. Finally, the carbon price residual series undergoes decomposition into multiple components utilizing the complete ensemble empirical mode decomposition for subsequent forecasting and the aggregation of outcomes. Experiments are conducted to predict two carbon trading markets in Hubei and Guangzhou, and a feature importance analysis is performed. The results indicate that the proposed hybrid model consistently outperforms the comparative models in terms of prediction accuracy. Furthermore, it is revealed that historical carbon prices and European Union carbon prices are the key factors influencing the prediction of carbon market prices.

Comparing the EU and Chinese carbon trading market operations and their spillover effects

A carbon trading market (CTM) policy for trading carbon dioxide emission rights as a commodity was created to reduce greenhouse gas emissions. CTMs operate differently in different countries and regions, and their interactions deserve an in-depth study. This study focused on the world's largest CTM, the European Union (EU), and the CTM of China, largest carbon-emitting country. First, we evaluate the liquidity and volatility of the two CTMs. Subsequently, the VAR model is used to explore the mean spillover effect between the two markets and the BEKK-GARCH model is used to explore the volatility spillover effect between the two markets. The study concludes that: (1) The liquidity of China's CTM is better than that of the EU's CTM. (2) Both the EU and Chinese CTMs are unstable, but the volatility of the Chinese CTM is lower than that of the EU CTM. (3) Price changes in the EU and Hubei CTMs have a mutual influence. (4) There are interactions between the market fluctuations of the EU CTM and the Shanghai CTM and those of the EU CTM and the Hubei CTM. The results of this study have implications for the construction and development of CTMs in the EU and China.

Optimal allocation of the EU carbon budget: A multi-model assessment

The European Union (EU) has pledged to reduce greenhouse gas (GHG) emissions until the year 2030 by 55% compared to 1990. Recently, the EU institutions decided to introduce a new Emission Trading System for road transport, buildings and fuels for additional sectors (ETS2) in addition to the current EU ETS. Contested design features were the split of the carbon budget between the EU ETS and the remaining sectors regulated under the Effort Sharing Regulation (ESR), and the carbon price level of the ETS2. Conducting a multi-model assessment, we find that the agreed allocation of the carbon budget between EU ETS and ESR sectors seems almost optimal from an economic efficiency point of view. We also find that if carbon prices are the only instruments used, the prices necessary to reach the emission targets range from 130 to 286 €/tCO2 in the EU ETS and from 175 to 360 €/tCO2 for the energy-related ESR (ESR-E) emissions – depending on technology development and baseline assumptions of the different models. Our results imply that when the ETS2 price does not go above the “indicative cap” of 45 €/tCO2, the abatement target will not be reached with a carbon price alone. The remaining abatement needs to come from complementary policies like technology standards or subsidies. As abatement costs from these policies are above 45 €/tCO2, effective costs for consumers could well exceed the costs of carbon pricing alone due to inefficiencies that arise from the lack of flexibility to mitigate emissions where it is cheapest.

Which sectors should be covered by the EU Carbon Border Adjustment Mechanism?

The European Union (EU) is developing the Carbon Border Adjustment Mechanism (CBAM) to address carbon leakage in international trade. However, the EU has paid inadequate attention to input‒output linkages, specifically those in the steel, aluminum, and fertiliser industries. This study aims to identify priority sectors eligible for initial regulation within the emissions-intensive trade-exposed (EITE) industries based on input–output linkages and compare its impacts with the current CBAM sector coverage. This study constructs a Global Production Network (GPN) and Carbon Flow Network (CFN) to present the input trade and embodied carbon flows for the EITE industries. This study highlights the role of the EITE industries as influential nodes in the production network and how the EITE industries in the EU contribute to carbon emissions. To improve the economy and political acceptability, CABM should cover four priority sectors with low economic impacts but a crucial role in reducing emissions, such as plastics, phosphorus fertiliser, aluminum, and copper industry.

The time-varying effects of liquidity and market efficiency of the European Union carbon market: Evidence from the TVP-SVAR-SV approach

We use the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) and causality-in-quantiles methods to explore the linkage between market liquidity and efficiency in the European Union Emissions Trading Scheme (EU ETS) during Phase III. Our findings indicate that two-way causality existed under normal and lower market conditions. Additionally, the linkage between liquidity and efficiency exhibits time-varying characteristics. Except in cases of extremely high market liquidity, the pass-through effect of liquidity on efficiency is mostly positive in the long run. The linkage is particularly stronger in the medium and long term. However, the response of liquidity to efficiency shocks is more complicated. Market efficiency generally has an overall inhibitory effect on liquidity in the short term and a promoting effect in the medium and long term. Furthermore, we investigate the impulse response during the COVID-19 period and the war between Russia and Ukraine and find that improvements in efficiency will permanently damage liquidity. Overall, the abilities of market makers and arbitrage traders, impacted by multiple factors, play an important role in the process by which liquidity affects market efficiency. By revealing and explaining the dynamic relationship between liquidity and efficiency, this research provides valuable information for policymakers and various market participants.