European Union ETS Research Articles

On the legality of national carbon pricing instruments alongside the new EU ETS 2

With the EU ETS 2 a new EU-wide emissions trading system is introduced that covers the greenhouse gas emission of the buildings and road transport sectors, i.e. sectors the decarbonization of which has so far been the responsibility of the Member States under the Effort Sharing Regulation. Since they will remain responsible for the achievement of their national greenhouse gas emission reduction targets under that regime, the question arises whether the Member States can maintain or introduce additional carbon pricing instruments alongside the new EU ETS 2. Hence, this paper examines the legality of such an approach, by assessing relevant provisions of EU secondary and primary law. Without going deep into the economic and political considerations, it concludes that from a legal perspective, the coexistence of national carbon pricing instruments and the EU ETS 2 is not prohibited.With the latest reform of the EU Emissions Trading System Directive (ETS Directive), the European Union (EU) has introduced a new EU emissions trading system for buildings and road transport (EU ETS 2)1. The decarbonization of those sectors traditionally falls within the responsibility of the EU Member States under the regime of the Effort Sharing Regulation (ESR). The ESR introduces legally binding national greenhouse gas (GHG) emission reduction targets. Hence, over the last few years, the Member States have introduced different measures in order to reach their targets. Those include carbon pricing instruments, understood as measures that put a price on the emission of GHG and thus create an incentive to reduce those emissions. Carbon pricing instruments include carbon taxes, as well as emissions trading systems2. With the introduction of the new ETS 2, the question arises whether the Member States can maintain (or introduce) such national carbon pricing instruments in parallel to the new EU ETS 2.

Enter the CORSIA First Phase

Abstract The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) entered its First Phase on 1 January 2024. Aircraft operators are required to offset their emissions for the first time in this Phase to mitigate their climate impact. This note chronologises its major developmental trajectory leading up to this Phase. Furthermore, developments of climate initiatives at the regional level are related to CORSIA. It is noteworthy to see CORSIA from a European Union (EU) perspective because of the recent amendment to the EU Emissions Trading System (EU ETS). The European Commission has set a ‘deadline’ to review the effectiveness of CORSIA and made efforts to establish the EU ‘world premiere’ in the monitoring, reporting, and verification (MRV) of aviation non-CO2 emissions. This indicates a broader scope of the EU ETS than that of CORSIA. With the deadline and regional developments, CORSIA is approaching a juncture for the potential design changes from its sole focus on CO2 emissions to include non-CO2 emissions.

Assessing the influence of climate risk, carbon allowances, and technological factors on the ESG market in the European union

Environmental, Social, and Governance (ESG) is a market for environmental criteria that has recently attracted the attention of policymakers and in particular European Union (EU) countries to improve environmental quality. In the context of the EU Sustainable Development Goals, this study aims to examine the impact of climate risk uncertainties (transitional (TRI) and physical (PRI)), carbon allowances (EU ETS), and technology index (MSCI) on the ESG market. To this end, the study uses a quantile-on-quantile regression and its multivariate version for the period from November 28, 2007, to January 05, 2023. The results show that TRI and PRI increase ESG market development at higher quantiles, while EU ETS and technological progress reduce ESG progress. This shows that the risk of climate change requires the introduction of stricter environmental standards in EU countries, while the EU ETS and technological progress provide environmental benefits that reduce the need for the ESG market.

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.

Hedging Strategies in Carbon Emission Price Dynamics: Implications for Shipping Markets

The European Union (EU) has agreed to gradually include shipping in the EU emissions trading scheme (EU ETS), which makes shipping companies vulnerable to carbon price fluctuations. The aim of this paper is to investigate the effectiveness of carbon and petroleum futures contracts in managing carbon and bunker risks. We examine the effectiveness of alternative hedging methods, including both static and dynamic approaches, to estimate optimal hedge ratios under single and composite cross-hedge settings. Our results show that carbon future contracts are important for hedging the carbon emission allowances price risk, and Brent oil futures are the most effective instrument for out-of-sample hedging of bunker prices. In addition, the hedging effectiveness indicates that conventional methods outperform the sophisticated models in terms of variance reduction. Our study offers new insights into how the carbon and bunker markets relate to a combination hedging in reducing the joint price risk, which can be used to promote risk management in the market.

Divergences between the European Union and China on reducing international aviation emissions.

This paper provides a historical overview regarding the emergence, development and deepening of divergences between the European Union (EU) and the People's Republic of China (China) in reducing global aviation emissions. It focuses on their divergences on three specific issues, i.e. under which framework to tackle global aviation emissions, whether and how to reflect the Common but Differentiated Responsibilities and Respective Capabilities (CBDR-RC) principle in the design and implementation of the global market-based measures (MBMs) for international aviation and which role the International Civil Aviation Organization (ICAO) should play in offsetting these emissions. Besides, this paper explains the driving forces behind these divergences by examining both normative and economic-related factors, which have formed different stances of both sides. From a Chinese perspective, considerations about the issues of state sovereignty, fairness regarding burden sharing in tackling climate change, the development of China's aviation and aircraft manufacturing and its limited capability in promoting the large-scale SAF deployment help explain its hardline stance on reducing global aviation emissions. As for the EU, perceptions of its leading role in the global climate governance and the CBDR-RC principle, the targets of strengthening the EU ETS role in the global carbon market, and the competitiveness of the European airlines are underlying reasons behind its attempt to include the international aviation under its ETS. Moreover, the EU member states' support to the ICAO can be explained through the conformity between the emissions offsetting objectives under this organisation and the EU's current climate policies.

Does the European Union energy policy support progress in decoupling economic growth from emissions?

This study investigates the impact of the European Union (EU) energy policy on decoupling economic growth from emissions in the EU countries in the period between 1995 and 2017. The following three types of greenhouses gas emissions are considered in the study: emissions covered by the EU Emissions Trading System (EU ETS), production-based emissions (PBA), and consumption-based emissions (CBA). Decoupling emissions from the output is assessed in the successive phases of the EU ETS for trend components in the long run and for cyclical components in the short run.The results obtained reveal an ambiguous role played by the EU energy policy in long-term decoupling. On the one hand, there has been progress in decoupling economic growth from emissions covered by the EU ETS and production-based emissions in the EU-15 and in the new EU countries. On the other hand, in the case of consumption-based emissions, no progress has been recorded in both groups of countries. The results confirm a significant difference between the EU-15 and the new EU countries only when long-term decoupling is considered. The negative relationship between emissions covered by the EU ETS and production-based emissions and output is much stronger in the EU-15 countries than in the new EU countries.

A time sensitive graph model for conflict resolution with application to international air carbon negotiation

The uneven time required for decision making by negotiators can greatly affect the results of international negotiations. A novel time sensitive graph model is developed to analyze international negotiations in which the duration of time is different for negotiators, or called decision makers, to implement each action. In this novel model, the process of negotiation is divided into multiple phases. Decision makers may fail to achieve desired outcomes due to time constraints when approaching the deadline of each stage. Time sensitive stabilities are defined to describe this particular behavior patterns of decision makers. The interrelationships between classical stabilities and time sensitive stabilities are investigated. Propositions are provided to indicate how equilibrium can be affected by the change of action time. This novel methodology is applied to an air carbon negotiation participated by three representative decision makers, the European Union (EU), major developing countries, and the United States (US), under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The time sensitive equilibrium at the end of Baseline Phase explains modification of the requirements for monitoring the CORSIA baseline emissions under the impact of the COVID-19 pandemic. The time sensitive equilibrium achieved after June 2020 suggests that the EU Carbon Trading System for Monitoring Air Carbon Baseline (EU ETS MRV) could be adjusted by the end of the Pilot Phase provided that both developing and non-EU developed countries put the EU under pressure by filing appeals at the International Civil Aviation Organization (ICAO) meetings not later than March 2022.

The volatility spillover effect of the European Union (EU) carbon financial market

This paper modifies the BEKK-GARCH model based on the empirical results of the VAR model to analyze the dynamic volatility spillover effect between the European Union allowance (EUA) and certified emissions reduction (CER) markets during the second and third phases of the European Union Emission Trading System (EU ETS). The empirical results show that (1) an asymmetric volatility spillover effect exists between the EUA and CER markets and that the EUA market has a more significant volatility spillover effect on the CER market, and (2) the volatility spillover effect between the EUA and CER becomes weaker in phase III since the European Commission has limited the substitution of CER for EUA more strictly and the global carbon reduction requirements have become less demanding. Our study can help investors and managers of carbon market to have a more comprehensive understanding of the information and risk transmission mechanism between the EUA and CER markets, thus, providing them with a basis to make investment decisions and formulate policies.

The EU Emissions Trading System in Crisis-Ridden Greece: Climate under Neoliberalism

Neoliberal capitalism has extended the use of markets to address climate and energy issues. Carbon trading characteristically exemplifies the neoliberalization of climate policy. This paper discusses the workings of the European Union’s Emissions Trading System (EU ETS) in the European Union (EU) with a focus on its application in crisis-ridden Greece. Beyond environmental effectiveness and distributional effects, the paper explores the interactions of the EU ETS with crisis, austerity programs, energy poverty, and uneven development. Despite adjustments and changes, the EU ETS continues to indicate limited environmental effectiveness and unjust distributional effects. Moreover, by forging a centralized neoliberal transition to a low-carbon economy without consideration of the issues faced by unevenly developed and crisis-stricken EU members such as Greece, the EU ETS leads to additional disturbances and problems for the Greek economy as a whole, its pauperized working people, and its energy and climate options to reduce emissions on its own potential, needs, and priorities.

Border Carbon Adjustments and Alternative Measures for the EU ETS: An Evaluation

As part of its Green Deal, the European Commission is considering the introduction of border carbon adjustments and alternative measures. The measures, which would primarily apply to basic materials like steel and cement, pursue a double objective: they are aimed at enhancing the effectiveness of carbon pricing for the transition to climate neutrality but also at avoiding carbon leakage risks. When implementing carbon adjustment mechanisms and alternative measures, various design options might be considered to reform the EU Emissions Trading Scheme (EU ETS). In this paper, we have decided to focus on three main models, which help to highlight the main differences between the available options. Under the first model, importers of basic materials would be required to surrender carbon allowances at the level of a product benchmark or, where lower, at the verified level of foreign carbon intensity. In parallel, allocation of free allowances would be phased out. Under the second model, a symmetric adjustment mechanism for exports and imports would be adopted, including refund to exporters for the carbon costs incurred on basic materials embodied in products. Finally, under the third model, the EU ETS would be complemented with a climate contribution charged for materials sold in the European Union (EU) at the product benchmark level related to the carbon intensity of each material. The free allowance allocation regime would then be modified to be directly linked to the volume of material production at the product benchmark level. In order to contribute to the current policy debate, we evaluate for each of these three models, their legality, coherence with EU climate objectives, effectiveness in carbon leakage prevention, potential international implications, as well as their administrative complexity and compliance costs.

MONEY DOES GROW ON TREES: IMPACTS OF THE PARIS AGREEMENT ON THE NEW ZEALAND ECONOMY

The Paris Agreement (PA) asserts that emissions pathways of greenhouse gases (GHG) should be consistent with holding the increase in global temperature below 1.5[Formula: see text]C or 2[Formula: see text]C above pre-industrial levels. New Zealand (NZ) committed to reduce emissions to 30% below 2005 levels by 2030. The purpose of this paper is to assess the range of economic costs for NZ derived from the commitment under the PA, conditional to the mitigation potential of forestry carbon sequestration (FCS), pricing agricultural emissions, and linking the NZ emissions tradable scheme (NZ ETS) to the European Union ETS (EU ETS). We use a general equilibrium model and “soft-link” it with the global timber model. We found that NZ can meet the PA terms; however, important GDP decreases may arise due to limited domestic mitigation potential from the energy and transport sectors. FCS plays a significant role in mitigating the negative impacts, where the benefits of FCS outweigh those of pricing agricultural emission and linking the NZ ETS.

Measuring the energy efficiency for airlines under the pressure of being included into the EU ETS

SummaryIn 2008, European Union (EU) announced that from 2012, each international flight taking off and landing in EU would be given an emission permit. Therefore, the period of 2008–2012 can be regarded as a buffer period for global airlines. Although EU formally decides to exclude non‐EU airlines from the EU Emission Trading System on March 4, 2014, it is necessary to investigate the impacts of the policy on airline energy efficiency in this period. Airline energy efficiency is divided into three stages—operations stage, service stage, and sales stage—and Greenhouse gas emission is treated as an undesirable output of service stage. Two models, network range‐adjusted measure model with weak disposability and network range‐adjusted measure model with strong disposability, are established to evaluate the efficiencies of 22 international airlines from 2008 to 2012. The results show that (i) most airlines' efficiencies have decreased in the period, and the EU Emission Trading System is not effective for the efficiency improvement; (ii) the average efficiency of European airlines is almost the same as that of non‐European airlines; and (iii) the model with weak disposability is more reasonable in distinguishing efficiency differences, while strong disposability is a more reasonable way in treating undesirable outputs. Copyright © 2016 John Wiley & Sons, Ltd.

Inclusion of Consumption into the EU ETS: The Legal Basis under European Union Law

Traditionally discussed measures to prevent carbon leakage under the European Union (EU) emissions trading system, such as the free allocation of allowances or border carbon adjustments, either suffer from significant economic drawbacks or have seen their political, legal and administrative feasibility questioned. Recently, a novel approach has been proposed in the form of the inclusion of consumption into emissions trading schemes. Under this approach, a charge would be imposed on carbon‐intensive products at the time of their release for consumption within the EU. After sketching this proposal, this article discusses the correct legal basis under EU law. It develops the argument that the inclusion of consumption may be based on Article 192.1 of the Treaty on the Functioning of the EU and thus be adopted without unanimity voting in the Council of the EU.

Constructing post-carbon institutions: Assessing EU carbon reduction efforts through an institutional risk governance approach

This paper examines three different governance approaches the European Union (EU) and Member States (MS) are relying on to reach a low carbon economy by 2050. Current governance literature explains the operational methods of the EU's new governance approach to reduce carbon emissions. However, the literature neglects to account for the perceived risks that inhibit the roll-out of new low carbon technology. This article, through a novel approach, uses a grounded theoretical framework to reframe traditional risk literature and provides a connection to governance literature in order to assess the ability of EU governance mechanisms to reduce carbon emissions. The empirical research is based on responses from European energy stakeholders who participated in a Delphi method discussion and in semi-structured interviews; these identified three essential requirements for carbon emissions to be reduced to near zero by 2050: (1) an integrated European energy network, (2) carbon pricing and (3) demand reduction. These features correspond to institutionalized responses by the EU and MS: the Agency for the Cooperation of Energy Regulators (ACER); European Union Emission Trading Scheme (EU ETS) and energy efficiency directives and policies integrated into existing MS institutions. The theoretical and empirical findings suggest that governance by facilitation (energy efficiency) fails to induce significant investment and new policy approaches and cannot be relied on to achieve requisite reductions in demand. Governance by negotiation (ACER) and governance by hierarchy (EU ETS) do reduce risks and may encourage the necessary technological uptake. The term ‘risk governance’ is used to explain the important role governance plays in reducing risks and advancing new technology and thereby lowering carbon emissions in the energy sector.

The ICAO Assembly Resolutions on International Aviation and Climate Change: An Historic Agreement, a Breakthrough Deal and the Cancun Effect

In what the International Civil Aviation Organization (ICAO) heralds as a 'historic agreement' and the European Union (EU) calls a 'breakthrough deal', the recent ICAO Assembly Resolutions A37-18 and 19 mark the end of the Assembly Resolution A36-22 'mutual agreement' stalemate on emissions trading, which represents a significant achievement with respect to aviation and climate change. Although Assembly Resolutions A37-18 and 19 are non-binding, the as yet 'aspirational' goals that they set out demonstrate the collective will of the civil aviation industry and ICAO Member States to work together towards the common objective of limiting and reducing the global impact of aviation noise and emissions. The texts of Assembly Resolutions A37-18 and 19 prompt closer analysis vis-à-vis questions of whether ICAO is (still) the appropriate forum for addressing international aviation emissions and on the legitimacy of its manifesto for continuous leadership. ICAO's general approval for use of market-based mechanisms to establish a viable global framework mechanism for aviation emissions is also noteworthy, particularly in the context of the EU's Emissions Trading Scheme (EU ETS), the position of the Convention on International Civil Aviation (the Chicago Convention), and recent legal challenge against inclusion of aviation in the scheme. This article suggests that on emergence from the United Nations Framework Convention on Climate Change (UNFCCC)'s 16th Conference of the Parties (COP-16) in Cancun in December 2010, the ICAO Member States and the aviation sector should feel proud that the spirit of cooperation and sense of success they promoted in the wake of the recent ICAO Assembly Resolutions may have contributed to the most recent progress in the global campaign against climate change: the Cancun Agreements. Thus, this article argues it is foreseeable that the latest progress under the UNFCCC process will have a reverse demonstrative effect on future ICAO dialogue and resolution.

Lowest-cost Abatement in Light of the EU ETS and Renewable Feed-in Tariffs in the Electricity Sector in Bulgaria

The European Union (EU) climate and energy package has laid the ground for factoring in the costs of externalities from economic activities. Bulgaria has implemented the package with its competing policy instruments – emissions trading and renewable feed-in tariffs. Considering that these incentives to foster carbon abatement have created a playing field for investments in clean technologies, any lack of coordination may produce unintended consequences. There are indications that the main principle underpinning the EU emissions trading scheme (EU ETS), which is to allow emission reductions to take place in a costeffective manner, has been disregarded under the pressure to adopt feed-in tariffs.

The EU ETS in the European Climate Policy Mix: Past, Present and Future

Emissions trading is arguably the lynchpin of EU (European Union) climate policy. In January 2005 the EU adopted a cap-and-trade emissions trading system, through which a certain emission cap was set and a fixed number of emission allowances distributed amongst installations in the various Member States. Although the system has encountered some problems, the EU has not lost faith in it. In fact, even more now depends on its performance – not least the EU’s credibility in international climate politics – than when it was first adopted. The system is undeniably innovative. Prior to 2005, only a few countries had experimented with emissions trading, and no one had ever attempted to employ it at a supranational level. Against this background, this report seeks to analyse and assess the functioning of the EU ETS from a political and legal perspective, and to explore how capable the scheme is to deal with future challenges. To this end, the report examines the past, present and future of emissions trading in the EU.

An analysis of Australia’s carbon pollution reduction scheme

The authors review the decision‐making since the Labour Government came into office (November 2007). The Australian Government’s ‘Carbon Pollution Reduction Scheme’ White Paper (15 December 2008) proposes that an Australian Emissions Trading Scheme (AETS) be implemented in mid‐2010. Acknowledging that the scheme is comprehensive, the paper finds that in many cases, Australia will take a softer approach to climate change through the AETS than the European Union ETS (EUETS). The paper assesses key issues in the White Paper such as emissions reduction targets, GHG coverage, sectoral coverage, inclusion of unlimited quantities of offsets from Kyoto international markets and exclusion of deforestation activities.

Dynamic behavior of CO 2 spot prices

CO 2 emission allowances are traded nowadays over the counter (OTC) and on exchanges across the European Union (EU). It thus becomes increasingly important for traders of these emission certificates to have a valid CO 2 spot price model to value potential derivatives. In addition, CO 2-emitting companies require an adequate CO 2 spot price model in order to better assess their production costs and support emissions-related investment decisions. However, sufficient price history is still lacking for the European Union emission trading scheme (EU ETS). We therefore present a tractable stochastic equilibrium model reflecting stylized features of the EU ETS and analyze the resulting CO 2 spot price dynamics. Our main findings are that CO 2 prices do not have to follow any seasonal patterns, discounted prices should possess the martingale property, and an adequate CO 2 price process should exhibit a time- and price-dependent volatility structure. A brief empirical examination regarding market efficiency complements our analysis.