Higher Carbon Price Research Articles

Supplier Selection and Order Allocation under a Carbon Emission Trading Scheme: A Case Study from China.

In implementing carbon emission trading schemes (ETSs), the cost of carbon embedded in raw materials further complicates supplier selection and order allocation. Firms have to make decisions by comprehensively considering the cost and the important intangible performance of suppliers. This paper uses an analytic network process–integer programming (ANP–IP) model based on a multiple-criteria decision-making (MCDM) approach to solve the above issues by first evaluating and then optimizing them. The carbon embedded in components, which can be used to reflect the carbon competitiveness of a supplier, is integrated into the ANP–IP model. In addition, an international large-scale electronic equipment manufacturer in China is used to validate the model. Different scenarios involving different carbon prices are designed to analyze whether China’s current ETS drives firms to choose more low-carbon suppliers. The results show that current carbon constraints are not stringent enough to drive firms to select low-carbon suppliers. A more stringent ETS with a higher carbon price could facilitate the creation of a low-carbon supply chain. The analysis of the firm’s total cost and of the total cost composition indicates that the impact of a more stringent ETS on the firm results mainly from indirect costs instead of direct costs. The indirect cost is caused by the suppliers’ transfer of part of the low-carbon investment in the product, and arises from buying carbon permits with high carbon prices. Implications revealed by the model analysis are discussed to provide guidance to suppliers regarding the balance between soft competitiveness and low-carbon production capability and to provide guidance to the firm on how to cooperate with suppliers to achieve a mutually beneficial situation.

Technoeconomic assessments of hybrid photovoltaic-thermal vs. conventional solar-energy systems: Case studies in heat and power provision to sports centres

This paper presents a comprehensive analysis of the energetic, economic and environmental potentials of hybrid photovoltaic-thermal (PVT) and conventional solar energy systems for combined heat and power provision. A solar combined heat and power (S-CHP) system based on PVT collectors, a solar-power system based on PV panels, a solar-thermal system based on evacuated tube collectors (ETCs), and a S-CHP system based on a combination of side-by-side PV panels and ETCs (PV-ETC) are assessed and compared. A conventional CHP system based on a natural-gas-fired internal combustion engine (ICE) prime mover is also analysed as a competing fossil-fuel based solution. Annual simulations are conducted for the provision of electricity, along with space heating, swimming pool heating and hot water to the University Sports Centre of Bari, Italy. The results show that, based on a total installation area of 4000 m2 in all cases, the PVT S-CHP system outperforms the other systems in terms of total energy output, with annual electrical and thermal energy yields reaching 82.3% and 51.3% of the centre’s demands, respectively. The PV system is the most profitable solar solution, with the shortest payback time (9.4 years) and lowest levelised cost of energy (0.089 €/kWh). Conversely, the ETC solar-thermal system is not economically viable for the sports centre application, and increasing the ETC area share in the combined PV-ETC S-CHP system is unfavourable due to the low natural gas price. Although the PVT S-CHP system has the highest investment cost, the high annual revenue from the avoided energy bills elevates its economic performance to a level between those of the conventional PV and ETC-based S-CHP systems, with a payback time of 13.7 years and a levelised cost of energy of 0.109 €/kWh. However, at 445 tCO2/year, the CO2 emission reduction potential of the PVT S-CHP system is considerably higher (by 40–75%) than those of the all other solar systems (254–317 tCO2/year). Compared to the solar energy systems, the ICE-CHP system has the shortest payback time (6.2 years), but its CO2 emission reduction (25 tCO2/year) is significantly lower. A high carbon price is beneficial for improving the cost-competitiveness of the solar energy systems, boosting its market penetration and helping to meet any carbon emission targets.

Pathway Analysis of a Zero-Emission Transition in the Nordic-Baltic Region

A zero-emission pathway for the Nordic and Baltic region in Europe is described based on the comprehensive policy and scenario analyses, accompanied by energy system modelling. The analyses show that a least-cost strategy would massively employ renewable energy, particularly in the power sector. Through strong coupling across energy sectors and countries, electricity would play a central role in the decarbonization of the main energy sectors. In particular power-to-heat conversion, where heat storage appears important in addition to existing hydropower. Technical and regulatory barriers in front of increased sector coupling and flexibility were identified, and policy measures are proposed to overcome these. In addition to a high carbon price, dynamic tariffs and taxation of electricity would be important to allow market signals for flexibility to reach end-users. A stronger power transmission connection from the Nordics to the mainland-Europe and the United Kingdom would be beneficial for the emission reductions and renewable energy use. The transition pathway analysis points out socio-technical issues such as social acceptance of large-scale new infrastructures (e.g., wind, cables). The energy system optimizations indicate that most of the investments needed for the zero-emission pathway until 2050 would take place already by 2030.

Beyond carbon pricing: policy levers for negative emissions technologies

ABSTRACT This paper explores policies for Negative Emissions Technologies (NETs), in an attempt to move beyond the supply-side focus of the majority of NETs research, as well as the current dominance of carbon pricing as the main NETs policy proposal. The paper identifies a number of existing policies from four key areas – energy/transport, agriculture, sub-soil, and oceans – which will have an impact on three NETs: Bioenergy with Carbon Capture and Storage (BECCS), Direct Air Capture (DAC), and terrestrial Enhanced Rock Weathering (ERW). We propose that non-climate co-benefits may be valuable in terms of the policy ‘demand pull’ for NETs; in particular, we find that ERW may provide multiple co-benefits which can be mandated through existing policy structures. However, interaction with numerous policy areas may also create barriers, particularly where there is tension between the priorities of different government departments. On the basis of existing and analogous policies from a range of geographical contexts and scales, this paper proposes four options for NETs policy that could be reasonably implemented in the near-term. We also argue that ERW demonstrates the importance of scale and framing, because the policy environment depends on whether it is framed as a soil amendment at local scales or as a climate stabilization technique at international scale. Key policy insights Co-benefits may assist the ‘demand pull’ for novel technologies by providing multiple policy angles for incentivisation rather than relying on a ‘fix-all’ policy such as a high carbon price. DAC with storage might be overly reliant on a high carbon price, because it only provides one core benefit – that of atmospheric carbon reduction. ERW may provide multiple co-benefits which can be mandated through existing policy structures, but should focus on using waste rock rather than mining virgin material. We propose four near-term options for NETs policy: funding for small-scale BECCS demonstration and an international biomass certification mechanism; small-scale loans for ERW on farms and promotion of locally-sourced rock residues; amendment of fertilizer subsidy schemes to include silicate rock; and a clearer framework for licensing sub-soil access for CO2 storage.

Achieving grid parity of wind power in China – Present levelized cost of electricity and future evolution

China has adopted an ambitious plan for wind power to achieve grid parity with the on-grid price of coal-fired power in 2020. Whether this target can be achieved is a great concern for policy makers as well as potential investors. To address this issue, we first estimate the future levelized cost of electricity (LCOE) of wind power using a learning curve method, and then determine whether grid parity can be achieved by comparing it with the on-grid price of coal-fired power. Specially, the effect of carbon pricing on the grid-parity is explored, and a sensitivity analysis on how the discount rates, learning rates, and curtailment rates affect grid parity is conducted. The learning rate of onshore wind power is estimated using a panel dataset consisting of information of 2059 onshore wind projects in China from 2006 to 2015. Based on this learning rate, the future LCOE of Chinese onshore wind power from 2016 to 2025 is calculated. The results show that the LCOE of onshore wind power decreases by 13.91% from 0.40 RMB/kWh in 2016 to 0.34 RMB/kWh in 2025. By comparing the LCOE with the on-grid price of coal-fired power, the grid parity of onshore wind power may be achieved in 2019. With the implementation of the carbon pricing policy, the grid parity will be achieved earlier. More specifically, with the carbon price reaching 10, 35, and 60 RMB/t CO2, the grid parity can be achieved in 2019, 2017, and 2016, respectively. The results of the sensitivity analysis show that in the case of high discount rates, low learning rates, high curtailment rates, high O&M cost and low capacity factor, the grid parity will be delayed, and a high carbon price will be required to achieve the grid parity.

Optimal forest rotation periods: integrating timber production and carbon sequestration benefits in Pinus tabulaeformis plantations on the Loess Plateau, P.R. China

ABSTRACT Determining the optimal rotation period was a crucial component of forest sustainable management strategies, especially under climate change. This paper had two objectives: (1) to determine the economic benefits and optimal rotation periods for timber production when coupled to carbon sequestration, as predicted by time series prediction models for Pinus tabulaeformis plantations in China; and (2) to evaluate how different carbon prices and interest rates affected optimal rotation periods using the forest land expectation value. The results suggested that time series prediction models were valuable for estimating timber volumes and carbon sequestrations based on surveys of different-aged stands. Importantly, since integrating carbon sequestrations into timber production benefits did not increase optimal rotation periods, this should promote P. tabulaeformis plantation management. In the sensitivity analysis, a higher carbon price increased the profitability of carbon sequestration and timber production, but not optimal rotation periods, though they were reduced under higher interest rates. In conclusion, incorporating both timber production and carbon sequestration benefits would sharply increase forest-based revenues, while realizing the carbon sequestration potential of P. tabulaeformis plantations. This approach was clearly useful to the development of reforestation/afforestation projects trying to mitigate climate change and also provided a theoretical basis for sustainable forest management.

Dynamic Climate Policy Under Firm Relocation: The Implications of Phasing Out Free Allowances

The allocation of free allowances for firms within the European Union Emissions Trading Scheme was found to lead to substantial overcompensation, which is why some stakeholders recently called for phasing out of free allowances in the near term. This paper analyzes the consequences of phasing out free allowances in a two-period model when one country unilaterally implements climate policies. A carbon price induces firms to invest in abatement capital, but may lead to the relocation of some firms. The regulator addresses the relocation problem by offering firms transfers, i.e. free allowances, conditional on maintaining the production in the regulating country. If transfers are unrestricted in both periods, then the regulator implements the first best by equalizing the carbon price with the marginal environmental damage and using transfers to prevent any relocation. However, if transfers in the future period are restricted, the planner optimally implements a declining carbon price path with the first period price exceeding the marginal environmental damage. A high carbon price triggers investments in abatement capital and thus creates a lock-in effect. With a larger abatement capital stock, firms are less affected by carbon prices in the future and therefore less prone to relocate in the second period.

Carbon revenue in the profitability of agroforestry relative to monocultures

The impact of carbon revenue on the profitability of agroforestry systems in comparison to monocultures is unexplored in regard to Sub-Saharan Africa. This study creates a multivariate model to evaluate the impact of carbon revenue on the profitability of agroforestry relative to the dominant monocultures in Ethiopia by using stylized plots. Yields and carbon stock changes of eight agroforestry systems were modeled based on data from agroforestry plots in the Ethiopian Central Rift Valley. According to our model, agroforestry was, on average, four times more profitable than the main monoculture systems (wheat, barley, maize, teff, sorghum, sugarcane and lentil) even when carbon revenues were excluded, primarily due to the higher prices of fruit produce. Carbon revenues were estimated using a plausible carbon price ranging from US$8/tCO2e to $40/tCO2e and carbon sequestration rates of 0.59 to 17.2 Mg C ha−1 year−1. The possibility of receiving carbon revenue increased the profitability of agroforestry by 0.5% when using the lowest utilized carbon price and carbon sequestration rate, by 20% when using the carbon price of $20 and the average carbon sequestration rate, and by 70% when using the highest price and highest sequestration rate of carbon. On average, carbon revenue increased the profitability of agroforestry by 150% in comparison to monoculture farming. We conclude that carbon income may have significant potential to motivate smallholders to convert to agroforestry when there is a proper management system, a sufficiently high carbon price and effective institutional support to mitigate the transition and transaction costs.

Optimal investment in electric generating capacity under climate policy

Mitigating climate change will require reduced use of fossil fuels to generate electricity. To do so while eschewing nuclear power, countries have turned to wind and solar energy. In this paper, load duration and screening curves are used to investigate the extent to which a jurisdiction should invest in intermittent (solar and wind) sources of energy, gas and nuclear power. The application is to the Alberta electricity grid because it is nearly 90 percent reliant on fossil fuels, particularly coal, and recent policy intends to eliminate coal generating capacity by 2030 and replace two-thirds of the lost capacity with renewables. Results suggest that solar and wind are unable to replace two-thirds of coal generation, and that larger than anticipated investments in natural gas capacity will be required. However, if Alberta is serious about reducing emissions, it will need to rely on nuclear energy; at high carbon prices, nuclear power could reduce CO2 emissions by some 95% compared to only 55% when relying totally on solar and wind.

Econometric supply-and-demand models to analyze carbon pricing policies

Abstract In this paper, the introduction of a carbon pricing policy in air transport industry is investigated. The impact on ticket prices, airlines’ market shares and resulting network-wide carbon emissions is studied via a methodology which includes a supply and demand model and a method for estimating carbon emissions costs by airline and itinerary. The application of the carbon pricing policy at the U.S. domestic aviation network revealed that the policy could have some significant effects on ticket prices, air travel demand and resulting CO2 emissions for high carbon price. But, to achieve the aviation industry ambitious goal to reduce net aviation CO2 emissions by 50% until 2050, this paper suggests that airlines and policy makers need to adopt a multi-faceted approach with carbon pricing policies, technological, operational and infrastructure improvements to ensure economic and environmental sustainability.

Heat or power: How to increase the use of energy wood at the lowest cost?

We compute the optimal subsidy level for fuelwood consumption that makes it possible to achieve the French biomass energy consumption target. For this purpose, we model the competition and trade-offs between the consumption of fuelwood for heat (FW-H) and the consumption of fuelwood for electricity (FW-E). To do so, we couple a forest sector model with an electricity simulation model, and we test different scenarios combining FW-H and FW-E that account for contrasting potential increases in the carbon price and the potential reduction in the number of nuclear plants. We assess the implications of these scenarios on (1) the budgetary costs for the government, (2) industrial wood producers' profits, (3) cost savings in the power sector for the different scenarios tested, and (4) the carbon balance.We show that the scenario with the highest carbon price and the lowest number of nuclear plants is the least expensive from a budgetary perspective. Indeed, when associated with a high carbon price, co-firing may increase FW-E demand with a lower subsidy level, which makes it possible to reduce the cost of reaching the target. However, in this case, FW-E crowds out part of FW-H, which may cause political and economic issues. From a carbon balance perspective, an FW-H-only scenario performs better than any other scenario that combines FW-H and FW-E due to the relatively low emissions factors of alternative technologies for electricity generation and, in particular, nuclear energy.

Low Carbon Distribution Channel Coordination with a Capital-Constrained Retailer

Capital constraints exist in many supply chains. We examine a low carbon distribution channel that consists of a manufacturer and a retailer, in which the retailer is constrained by capital. The retailer can be financed by bank credit from a competitive bank market. A Stackelberg model is developed to analyze the integrated decision-making process of ordering, financing, and emission reduction. By comparing the decentralized and centralized channels, we obtain that the manufacturer’s green technology investment should be linearly proportional to the retailer’s order quantity in both channels. Thus, a large order quantity leads to increased efforts to reduce emissions. Results further show that the centralized channel in some cases has fewer emissions and can generate more profits for the whole supply chain compared with the decentralized channel. We therefore propose a revenue sharing contract with a function form to coordinate the distribution channel. When the government allocates appropriate quotas to the supply chain, high carbon price can benefit the environment and supply chain efficiency.

The Water Implications of Greenhouse Gas Mitigation: Effects on Land Use, Land Use Change, and Forestry

This study addresses the water quantity and quality implications of greenhouse gas mitigation efforts in agriculture and forestry. This is done both through a literature review and a case study. The case study is set in the Missouri River Basin (MRB) and involves integration of a water hydrology model and a land use model with an econometric model estimated to make the link. The hydrology model (Soil and Water Assessment Tool, SWAT) is used to generate a multiyear, multilocation dataset that gives estimated water quantity and quality measures dependent on land use. In turn, those data are used in estimating a quantile regression model linking water quantity and quality with climate and land use. Additionally, a land use model (Forest and Agricultural Sector Optimization Model with Greenhouse Gases, FASOMGHG) is used to simulate the extent of mitigation strategy adoption and land use implications under alternative carbon prices. Then, the land use results and climate change forecasts are input to the econometric model and water quantity/quality projections developed. The econometric results show that land use patterns have significant influences on water quantity. Specifically, an increase in grassland significantly decreases water quantity, with forestry having mixed effects. At relatively high quantiles, land use changes from cropped land to grassland reduce water yield, while switching from cropping or grassland to forest yields more water. It also shows that an increase in cropped land use significantly degrades water quality at the 50% quantile and moving from cropped land to either forest or pasture slightly improves water quality at the 50% quantile but significantly worsens water quality at the 90% quantile. In turn, a simulation exercise shows that water quantity slightly increases under mitigation activity stimulated by lower carbon prices but significantly decreases under higher carbon prices. For water quality, when carbon prices are low, water quality is degraded under most mitigation alternatives but quality improves under higher carbon prices.

Optimization on emission permit trading and green technology implementation under cap-and-trade scheme

Abstract More and more countries and regions have turned to the cap-and-trade scheme to control carbon emissions. Proper planning of emission permit trading and green technology implementation is beneficial for a generating company to achieve its emission targets at the lowest possible cost. In this paper, a multistage mixed-integer nonlinear programming model is formulated to help make these decisions, which minimizes the total cost of green technology investment, emission permit trading and holding. Differing from previous research, this model captures the characteristics associated with green technology, notably its implementation lasting as a project for several periods and investment cost declining over time due to technology maturation. The holding cost of emission permits as a new operational resource under the cap-and-trade scheme and auto-regression of the carbon price are also considered in the proposed model. The analytical results suggest the optimal trading period and the trading amount of emission permit as well as the starting period for implementing green technology. It is found that the optimal trading period has nothing to do with initial emission permit quota allocated by regulator. In addition, whether or not to invest in green technology is determined by balancing the investment cost and its resulting benefit of reduced emission. Higher carbon price and unit holding cost of emission permit will incent the generating companies implement green technology. The analysis results also illustrate the specific regions in which cleaner/dirtier green technology will be selected or none of them will be considered. Finally, numerical examples validate the analytical results.

Border Adjustments Supplementing Nationally Determined Carbon Pricing

As agreed on in the Paris Agreement, each country determines its own contribution to combat climate change on a voluntary basis. There is no mechanism to force a country to comply with its own nationally determined contributions. This bottom-up approach builds on unilateral actions and yields a kind of carbon pricing, which is not necessarily identical across countries. As a consequence, these nationally determined climate policies have drawbacks in terms of carbon leakage and loss of competitiveness for firms producing in high carbon price countries. To reduce these negative effects, border adjustments (BAs) may be appropriate subsequent to more stringent environmental regulation. We model a three-stage game involving carbon price competition in the first stage, the introduction of BAs in the second stage and oligopolistic competition between firms in the third stage. Strategic trade theory suggests that the qualitative results about the optimal BA policy may vary with the underlying type of competition, namely Bertrand and Cournot competition. However, our results are similar for both types of competition. We conclude that BAs are suitable for supporting a more stringent environmental policy. Moreover, we find that anticipation of the implementation of BAs in the second stage yields higher average carbon prices in the first stage since high carbon price countries increase their carbon prices whereas the other countries partially offset.

Be careful what you calibrate for: Social discounting in general equilibrium

Concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior, particularly in climate change economics (e.g., Stern, 2006). This paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate-economy model with differential planner-household discounting. First, I show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy: If the government discounts the future less than households, implementing the optimal allocation requires an effective capital income subsidy (a negative intertemporal wedge), and, in a setting with distortionary taxation, an effective labor-consumption tax wedge that is decreasing over time. Second, if the government cannot subsidize capital income, the constrained-optimal carbon tax may be up to 50% below the present value of marginal damages (the social cost of carbon) due to the general equilibrium effects of climate policy on household savings. Third, given the choice to optimize either carbon, capital, or labor income taxes, the socially discounting planner's welfare ranking is ambiguous over a standard range of parameters. Overall, in general equilibrium, a policy-maker's choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy.

On the Effectiveness of the Abatement Policy Mix: A Case Study of China’s Energy-Intensive Sectors

To achieve carbon emissions control targets, policymakers often need a basket of policies to account for the complexity of abatement. The instruments in the policy mix are often interconnected. It is of great importance to study how different abatement policies perform in practice—in other words, to evaluate the effectiveness of the abatement policy mix. This paper builds a multisector partial equilibrium model and then studies the policy effectiveness using data from two energy-intensive sectors in China, namely, the iron and steel sector and the cement sector. The results show clear evidence that these policies interact, and the policy mix is not a simple aggregation but rather differs across sectors, which leads to fundamentally different scenarios in terms of energy savings, emissions reductions and production behaviors. Energy-savings subsidies can increase production and profit with a lower equilibrium level of carbon prices, whereas output-based rebating of allowances reduces production and is associated with higher carbon prices.

The impact of a short-term carbon payment scheme on forest management

We examine the feasibility and impacts of a short-term carbon payment mechanism on forest management in boreal forests. Unlike under long-term carbon sequestration commitments over a rotation period, landowners are allowed in this scheme to sell temporal carbon credits based on stored carbon for one year and reissue them annually. Using numeric optimization we show that the short-term carbon payment mechanism has a profound effect on the timing and intensity of thinning, and the optimal rotation length showing up in higher timber yield and improved profitability. A comparison of the case where all carbon or only additional carbon above that in timber management benchmark is accounted for by the short-term payment scheme shows that the optimal forest management remains roughly the same. However, the increase in the profitability of forestry introduced by carbon credits is relatively small, if only additional carbon is credited. Hence the short-term mechanism may be feasible only under high carbon prices and it would most likely increase rotation length of mature stands with additionality requirement in boreal forests.

Getting ready for future carbon abatement under uncertainty – Key factors driving investment with policy implications

Carbon capture and storage (CCS) is considered a key technology option for abating CO2 emissions in carbon-intensive sectors, e.g. the power sector. However, high investment costs and risk hinder the diffusion of CCS. To avoid stranded assets or high future costs for retrofitting, new plants can be made carbon capture ready (CCR) to enable them to accommodate future CCS retrofitting at low additional costs. Current CCR investment decisions are closely related to future CCS retrofitting and CCS operation decisions in subsequent stages, all of which would be affected by uncertainties. We develop a three-stage CCR investment decision model under multiple uncertainties which allows for investment and especially operating flexibilities. Applying this model to China shows that CCS operating flexibility under the carbon-pricing scheme may actually lower the probability of investing in a CCR plant, and neglecting it may overestimate the propensity for investing in CCR. Moreover, learning effects, which reduce the costs of future CCS retrofitting, may be detrimental to CCR investment, indicating that the policy support for research on, development of, and deployment of CCS to reduce CCS costs should be coordinated with CCR investments. Although higher electricity prices can increase the value of an investment opportunity, it may restrain CCR investment. Finally, CCR investment does not appear to be economically viable under current conditions in China because of low carbon prices, high carbon price risks, high CCR investment costs and the high opportunity costs of CCS operation.

A novel multiscale nonlinear ensemble leaning paradigm for carbon price forecasting

In this study, a novel multiscale nonlinear ensemble leaning paradigm incorporating empirical mode decomposition (EMD) and least square support vector machine (LSSVM) with kernel function prototype is proposed for carbon price forecasting. The EMD algorithm is used to decompose the carbon price into simple intrinsic mode functions (IMFs) and one residue, which are identified as the components of high frequency, low frequency and trend by using the Lempel-Ziv complexity algorithm. The Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model is used to forecast the high frequency IMFs with ARCH effects. The LSSVM model with kernel function prototype is employed to forecast the high frequency IMFs without ARCH effects, the low frequency and trend components. The forecasting values of all the components are aggregated into the ones of original carbon price by the LSSVM with kernel function prototype-based nonlinear ensemble approach. Furthermore, particle swarm optimization is used for model selections of the LSSVM with kernel function prototype. Taking the popular prediction methods as benchmarks, the empirical analysis demonstrates that the proposed model can achieve higher level and directional predictions and higher robustness. The findings show that the proposed model seems an advanced approach for predicting the high nonstationary, nonlinear and irregular carbon price.