Low Carbon Prices Research Articles

The impact of electricity demand reduction policies on the EU-ETS: Modelling electricity and carbon prices and the effect on industrial competitiveness

The European electricity market is linked to a carbon market with a fixed cap that limits greenhouse gas emissions. At the same time, a number of energy efficiency policy instruments in the EU aim at reducing the electricity consumption. This article explores the interactions between the EU's carbon market on the one hand and instruments specifically targeted towards energy end-use efficiency on the other hand. Our theoretical analysis shows how electricity demand reduction triggered by energy efficiency policy instruments affects the emission trading scheme. Without adjustments of the fixed cap, decreasing electricity demand (relative to business-as-usual) reduces the carbon price without reducing total emissions. With lower carbon prices, costly low emission processes will be substituted by cheaper high emitting processes. Possible electricity and carbon price effects of electricity demand reduction scenarios under various carbon caps are quantified with a long-term electricity market simulation model. The results show that electricity efficiency policies allow for a significant reduction of the carbon cap. Compared to the 2005 emission level, 30% emission reductions can be achieved by 2020 within the emission trading scheme with similar or even lower costs for the industrial sector than were expected when the cap was initially set for a 21% emission reduction.

Energy use and CO2 emissions of China's industrial sector from a global perspective

The industrial sector has accounted for more than 50% of China's final energy consumption in the past 30 years. Understanding the future emissions and emissions mitigation opportunities depends on proper characterization of the present-day industrial energy use, as well as industrial demand drivers and technological opportunities in the future. Traditionally, however, integrated assessment research has handled the industrial sector of China in a highly aggregate form. In this study, we develop a technologically detailed, service-oriented representation of 11 industrial subsectors in China, and analyze a suite of scenarios of future industrial demand growth. We find that, due to anticipated saturation of China's per-capita demands of basic industrial goods, industrial energy demand and CO2 emissions approach a plateau between 2030 and 2040, then decrease gradually. Still, without emissions mitigation policies, the industrial sector remains heavily reliant on coal, and therefore emissions-intensive. With carbon prices, we observe some degree of industrial sector electrification, deployment of CCS at large industrial point sources of CO2 emissions at low carbon prices, an increase in the share of CHP systems at industrial facilities. These technological responses amount to reductions of industrial emissions (including indirect emission from electricity) are of 24% in 2050 and 66% in 2095.

Projected US timber and primary forest product market impacts of climate change mitigation through timber set-asides

Whereas climate change mitigation involving payments to forest landowners for accumulating carbon on their land may increase carbon stored in forests, it will also affect timber supply and prices. This study estimated the effect on US timber and primary forest product markets of hypothetical timber set-aside scenarios where US forest landowners would be paid to forego timber harvests for 100 years to increase carbon storage on US timberland. The scenarios featured payments to landowners of $0 (business-as-usual (BAU)), $10, and $15 per each additional metric ton (t) of carbon dioxide equivalent (CO2e) sequestered on the set-aside timberlands, with maximum annual expenditures of $3 billion. For the set-aside scenarios, reduction in timberland available for harvest resulted in increased timber prices and changes in US domestic production, consumption, net export, and timber market welfare. Economic analyses indicated that the scenario with more area set aside and the largest carbon mitigation benefit (lower carbon price, $10/t CO2e) would result in the largest decrease in market welfare, suggesting that climate change mitigation policies and programs would need to consider such impacts when evaluating the costs and benefits of climate change mitigation strategies in the forest sector.

Reducing the Cost of Post Combustion Capture Technology for Pulverized Coal Power Plants by Flexible Operation

Currently the low carbon prices, low Spreads and regulatory uncertainties hampers the business cases for coal-fired power plants with post-combustion capture (PCC) in Europe. Improvement of the business case of coal-fired power plants with post combustion capture requires a different approach in terms of operational dispatch and in terms of investment planning. Both items have been assessed using a comprehensive power plant valuation model developed by TNO.To change the typical base-load production profile of a coal-fired power plant into a more flexible production profile, a Flexible Operating Mechanisms (FOMs) has been developed for PCC.Based on the results of the techno-economic modeling, FOMs improve the business case. Next to this, FOMs present coal fuelled power plants with additional flexibility. This added flexibility could allow coal plants to provide auxiliary services to the grid and remain competitive in relation to cleaner gas-fired plants. The increase of operational flexibility with FOMs created a significant improvement of the NPV value and, therefore, it is justified to look in much more detail how the operational flexibility of a coal-fired power plant with Carbon Capture can be improved.Running a power plant with a 100% capture unit at base load will require significant amount financial support to close the gap. Starting with a smaller capture unit reduce the financial risk and could improve the business case of the coal-fired power plant without PCC from a marginal cost point of view. The main reason for this is the increase of flexibility, by switching on/off the capture unit. Next to this, the decision to invest is always affected by the opportunity costs of making a commitment now, and thereby, giving up the option of waiting for improved market condition. Increasing the size of the capture plant in stages enables the investor to manage those opportunity cost much better.

Ups and Downs: How Economic Growth Affects Policy Interactions

Current climate and energy policy has to operate under an ex-ante unforeseen economic crisis. An obvious consequence is the collapse of prices for carbon emission allowances as, for example, seen in the European Union. However, this price collapse may be amplified by the interaction of a carbon emission cap and supplementary policy targets such as the minimum shares for renewables in the power sector. The static interaction between climate and renewable policies has been discussed extensively. This paper extends this debate by analysing how uncertain differences in medium to long-run growth rates affect the efficiency and effectiveness of a policy portfolio containing an emission trading scheme and a target for a minimum renewable share. Making use of a simple partial equilibrium model we identify an asymmetric interaction of emissions trading and renewable quotas with respect to different growth rates of an economy. The results imply that unintended consequences of the policy interaction may be particularly severe and costly when economic growth is low and that carbon prices are more sensitive to changes in economic growth if they are applied in combination with renewable energy targets. Our main example for the policy interaction is the EU, yet our research also relates particularly well to the uncertainty of economic growth in fast growing emerging economies like China.

The impact of potential climate policy on the coal bed methane investment in China - a real option-based study

In this paper, based on the real option theory, the impact of the potential climate policy on the coal bed methane (CBM) investment in China is assessed from the perspective of CBM investment under the uncertainties of future climate policy and CBM market price. The threshold values of the market and policy variables to promote CBM project investment are obtained. Firstly, incorporating the greenhouse gas (GHG) abatement benefits into CBM investment evaluation will increase the future cash flow of CBM investment, and promote CBM investment significantly. Secondly, the potential climate policy is an important supplement to the traditional CBM policies, and will change the threshold value of traditional CBM policy variables such as CBM price, subsidy and tax. Thirdly, the current low international carbon price is not sufficient to promote large-scale CBM investment, and the future GHG abatement policy should be stringent to improve carbon price. At last, the high uncertainty of future climate policy would probably be a barrier to the CBM investment with the consideration of the GHG abatement benefits. So some necessary measures may need to be taken to reduce the climate policy uncertainty.

Assessing costs of soil carbon sequestration by crop-livestock farmers in Western Australia

Carbon sequestration in agricultural soil has been identified as a potential strategy to offset greenhouse gas emissions. Within the public debate, it has been claimed that provision of positive incentives for farmers to change their land management will result in substantial carbon sequestration in agricultural soils at a low carbon price. However, there is little information about the costs or benefits of carbon sequestration in agricultural soils to test these claims. In this study, the costeffectiveness of alternative land-use and land-management practices that can increase soil carbon sequestration is analysed by integrating biophysical modelling of carbon sequestration with wholefarm economic modelling. Results suggest that, for a case study model of a crop-livestock farm in the Western Australian wheatbelt, sequestering higher levels of soil carbon by changing rotations (to include longer pasture phases) incur considerable opportunity costs. Under current commodity prices, farmers would forego more than $80 in profit for every additional tonne of CO2-e stored in soil, depending on their adoption of crop residue retention practices. This is much higher than the initial carbon price of $23t−1 in Australia’s recently legislated carbon tax. This analysis does not incorporate the possibility that greenhouse gas emissions may increase as a result of including longer pasture phases. Accounting for emissions may substantially reduce the potential for net carbon sequestration at low carbon prices.

Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: an Australian View

This paper finds that a price floor is well suited to addressing policy generated carbon price risk as domestic and international policy frameworks mature, reducing the risk of unintended low carbon prices. The merits of floor prices in emissions trading schemes (ETS) depend on the problem addressed. Traditional hybrid approaches emphasise automatic response to lower than anticipated abatement costs, but we find adjusting emissions targets over time is the better way to deal with this in the context of climate policy. We find, however, that a price floor is well suited to addressing policy generated carbon price risk as domestic and international policy frameworks mature, reducing the risk of unintended low carbon prices. Reducing such downside risk can encourage cost effective investment in lowemissions assets that might otherwise be precluded by perceived policy risks, even if the price floor is never actually triggered. In Australia’s planned ETS, a price floor could support investments that lower the national emissions trajectory, and boost policy stability and credibility. A price floor in operation can increase the static costs of achieving a given emissions target, but reduce economic costs over time. Assessment of implementation options suggests a domestic reserve price for auctioned permits along with a periodically adjusted fee on the conversion of international permits for use in the domestic ETS. This approach minimises administrative complexity and avoids arbitrary interventions in carbon markets.

The Environmental and Economic Sustainability of Carbon Capture and Storage

For carbon capture and storage (CCS) to be a truly effective option in our efforts to mitigate climate change, it must be sustainable. That means that CCS must deliver consistent environmental and social benefits which exceed its costs of capital, energy and operation; it must be protective of the environment and human health over the long term; and it must be suitable for deployment on a significant scale. CCS is one of the more expensive and technically challenging carbon emissions abatement options available, and CCS must first and foremost be considered in the context of the other things that can be done to reduce emissions, as a part of an overall optimally efficient, sustainable and economic mitigation plan. This elevates the analysis beyond a simple comparison of the cost per tonne of CO2 abated—there are inherent tradeoffs with a range of other factors (such as water, NOx, SOx, biodiversity, energy, and human health and safety, among others) which must also be considered if we are to achieve truly sustainable mitigation. The full life-cycle cost of CCS must be considered in the context of the overall social, environmental and economic benefits which it creates, and the costs associated with environmental and social risks it presents. Such analysis reveals that all CCS is not created equal. There is a wide range of technological options available which can be used in a variety of industries and applications—indeed CCS is not applicable to every industry. Stationary fossil-fuel powered energy and large scale petroleum industry operations are two examples of industries which could benefit from CCS. Capturing and geo-sequestering CO2 entrained in natural gas can be economic and sustainable at relatively low carbon prices, and in many jurisdictions makes financial sense for operators to deploy now, if suitable secure disposal reservoirs are available close by. Retrofitting existing coal-fired power plants, however, is more expensive and technically challenging, and the economic sustainability of post-combustion capture retrofit needs to be compared on a portfolio basis to the relative overall net benefit of CCS on new-build plants, where energy efficiency can be optimised as a first step, and locations can be selected with sequestration sites in mind. Examples from the natural gas processing, liquefied natural gas (LNG), and coal-fired power generation sectors, illustrate that there is currently a wide range of financial costs for CCS, depending on how and where it is applied, but equally, environmental and social benefits of emissions reduction can be considerable. Some CCS applications are far more economic and sustainable than others. CCS must be considered in the context of the other things that a business can do to eliminate emissions, such as far-reaching efforts to improve energy efficiency.

Double Auction on International Transfer of Low-carbon Technology's price

Abstract We apply game theory to explore mechanisms promoting international transfer of low-carbon technologies under United Nations Framework Convention on Climate Change (UNFCCC). This article employs a model framework of double auction analyst the low efficiency of international transfer of low-carbon, to find out the reasons for the formation of this phenomenon and to develop corresponding policy. Pointed out that only the international community and the concerted efforts between countries can resolve the low efficiency of the transfer.

Price Floors in Emissions Trading to Reduce Policy Related Investment Risks: An Australian View

The merits of floor prices in emissions trading schemes (ETS) depend on the problem addressed. Traditional hybrid approaches emphasise automatic response to lower than anticipated abatement costs, but we find adjusting emissions targets over time is the better way to deal with this in the context of climate policy. We find, however, that a price floor is well suited to addressing policy generated carbon price risk as domestic and international policy frameworks mature, reducing the risk of unintended low carbon prices. Reducing such downside risk can encourage cost effective investment in low-emissions assets that might otherwise be precluded by perceived policy risks, even if the price floor is never actually triggered. In Australia's planned ETS, a price floor could support investments that lower the national emissions trajectory, and boost policy stability and credibility. A price floor in operation can increase the static costs of achieving a given emissions target, but reduce economic costs over time. Assessment of implementation options suggests a domestic reserve price for auctioned permits along with a periodically adjusted fee on the conversion of international permits for use in the domestic ETS. This approach minimises administrative complexity and avoids arbitrary interventions in carbon markets.

Determinants of the costs of carbon capture and sequestration for expanding electricity generation capacity

This study models the costs of electricity generation with carbon capture and sequestration (CCS), from generation at the power plant to carbon injection at the reservoir, examining the economic factors that affect technology choice and CCS costs at the individual plant level. The results suggest that natural gas and coal prices have profound impacts on the carbon price needed to induce CCS. To extend previous analyses we develop a "cost region" graph that models technology choice as a function of carbon and fuel prices. Generally, the least-cost technology at low carbon prices is pulverized coal, while intermediate carbon prices favor natural gas technologies and high carbon prices favor coal gasification with capture. However, the specific carbon prices at which these transitions occur is largely determined by the price of natural gas. For instance, the CCS-justifying carbon price ranges from $27/t CO 2 at high natural gas prices to $54/t CO 2 at low natural gas prices. This result has important implications for potential climate change legislation. The capital costs of the generation and CO 2 capture plant are also highly important, while pipeline distance and criteria pollutant control are less significant.

Carbon Capture and Storage Investment and Management in an Environment of Technological and Price Uncertainties

We have conducted a dynamic stochastic investment analysis of carbon capture, transport and storage (CCTS) retro tting in an environment of CO2 price and technology uncertainty. It includes the option to invest in, and to use or shut down, the CCTS unit. While modeling certificate price uncertainties is standard, stochastic processes including diminishing increments are implemented for thermal efficiency and investment cost improvements. Following a careful quantification of parameters, the optimal investment strategies are derived and used in Monte Carlo simulations to produce results on aggregate investment decision and resulting profits. All simulation data were presented graphically from a low optimal strategy level to an aggregated expected value level. Our results show, that the main determinate for the application of CCTS is the certificate price. However, realized technology learning results in an earlier application of the technology by electricity producers and also acts as an insurance against the low carbon prices which prohibit profitable CCTS operation.

Determinants of the Costs of Carbon Capture and Sequestration for Expanding Electricity Generation Capacity

The carbon capture and sequestration (CCS) literature to date lacks a comprehensive economic analysis. Our study addresses this need. It models the costs of the entire process, from generation at the power plant to carbon injection at the reservoir, examining the economic factors that affect technology choice and CCS costs. We consider three major fossil fuel generating technologies, each with and without CCS. Our results suggest that natural gas and coal prices have profound impacts on the carbon price needed to induce CCS. Previous cost modeling approaches do not capture this complexity. Therefore, we developed a cost region graph that models technology choice as a function of carbon and fuel prices. Generally, the least‐cost technology at low carbon prices is pulverized coal, while intermediate carbon prices favor natural gas technologies and high carbon prices favor coal gasification with capture. However, the specific carbon prices at which these transitions occur is largely determined by the price of natural gas. For instance, the CCS-justifying carbon price ranges from $100/t C at high natural gas prices to $200/t C at low natural gas prices. This result has important implications for potential climate change legislation. Additionally, our analysis informs the relative importance of other variables. Capital costs are highly important, as reflected by the impact of the Energy Policy Act of 2005, which substantially lowers the justifying carbon price and favors coal technologies. Pipeline distance and reservoir type have smaller impacts overall, but highlight the heterogeneity of costs across industry.

Payments for environmental services – Carbon finance options for smallholders’ agroforestry in Indonesia

Up to 25 percent of all anthropogenic greenhouse gas emissions are caused by deforestation, and Indonesia is the third largest greenhouse gas emitter worldwide due to land use change and deforestation. On the island of Sulawesi in the vicinity of the Lore Lindu National Park (LLNP), many smallholders contribute to conversion processes at the forest margin as a result of their agricultural practices. Specifically the area dedicated to cocoa plantations has increased from zero (1979) to nearly 18,000 hectares (2001). Some of these plots have been established inside the 220,000 hectares of the LLNP. An intensification process is observed with a consequent reduction of the shade tree density. This study assesses which impact carbon sequestration payments for forest management systems have on the prevailing land use systems. Additionally, the level of incentives is determined which motivates farmers to desist from further deforestation and land use intensification activities. Household behaviour and resource allocation is analysed with a comparative static linear programming model. As these models prove to be a reliable tool for policy analysis, the output can indicate the adjustments in resource allocation and land use shifts when introducing compensation payments. The data was collected in a household survey in six villages around the LLNP. Four household categories are identified according to their dominant agroforestry systems. These range from low intensity management with a high degree of shading to highly intensified systems with no shade cover. At the plot level, the payments required for inducing the adoption of more sustainable land use practices are the highest for the full shade cocoa agroforestry system, but with low carbon prices of €5 tCO2e-1 these constitute 5 percent of the cocoa gross margin. Focusing on the household level, however, an increase up to 18 percent of the total gross margin can be realised. Furthermore, for differentiated carbon prices up to €32 tCO2e-1 the majority of the households have an incentive to adopt the more sustainable shade intensive agroforestry system. Additionally, the results show that the deforestation activities of most households could be stopped with current carbon prices.

Payments for environmental services – Carbon finance options for smallholders’ agroforestry in Indonesia

Up to 25 percent of all anthropogenic greenhouse gas emissions are caused by deforestation, and Indonesia is the third largest greenhouse gas emitter worldwide due to land use change and deforestation. On the island of Sulawesi in the vicinity of the Lore Lindu National Park (LLNP), many smallholders contribute to conversion processes at the forest margin as a result of their agricultural practices. Specifically the area dedicated to cocoa plantations has increased from zero (1979) to nearly 18,000 hectares (2001). Some of these plots have been established inside the 220,000 hectares of the LLNP. An intensification process is observed with a consequent reduction of the shade tree density. This study assesses which impact carbon sequestration payments for forest management systems have on the prevailing land use systems. Additionally, the level of incentives is determined which motivates farmers to desist from further deforestation and land use intensification activities. Household behaviour and resource allocation is analysed with a comparative static linear programming model. As these models prove to be a reliable tool for policy analysis, the output can indicate the adjustments in resource allocation and land use shifts when introducing compensation payments. The data was collected in a household survey in six villages around the LLNP. Four household categories are identified according to their dominant agroforestry systems. These range from low intensity management with a high degree of shading to highly intensified systems with no shade cover. At the plot level, the payments required for inducing the adoption of more sustainable land use practices are the highest for the full shade cocoa agroforestry system, but with low carbon prices of €5 tCO2e-1 these constitute 5 percent of the cocoa gross margin. Focusing on the household level, however, an increase up to 18 percent of the total gross margin can be realised. Furthermore, for differentiated carbon prices up to €32 tCO2e-1 the majority of the households have an incentive to adopt the more sustainable shade intensive agroforestry system. Additionally, the results show that the deforestation activities of most households could be stopped with current carbon prices.

Reconciling Climate Change and Trade Policy

There is growing clamor in industrial countries for additional border taxes on imports from countries with lower carbon prices. The authors confirm the findings of other research that unilateral emissions cuts by industrial countries will have minimal carbon leakage effects. However, output and exports of energy-intensive manufactures are projected to decline potentially creating pressure for trade action. A key factor affecting the impact of any border taxes is whether they are based on the carbon content of imports or the carbon content in domestic production. Their quantitative estimates suggest that the former action when applied to all merchandise imports would address competitiveness and environmental concerns in high income countries but with serious consequences for trading partners. For example, China’s manufacturing exports would decline by one-fifth and those of all low and middle income countries by 8 per cent; the corresponding declines in real income would be 3.7 per cent and 2.4 per cent. Border tax adjustment based on the carbon content in domestic production, especially if applied to both imports and exports, would broadly address the competitiveness concerns of producers in high income countries and less seriously damage developing country trade.

Estimating the economic potential for agricultural soil carbon sequestration in the Central United States using an aggregate econometric-process simulation model

The purpose of this paper is to develop and apply a new method to assess economic potential for agricultural greenhouse gas mitigation. This method uses secondary economic data and conventional econometric production models, combined with estimates of soil carbon stocks derived from biophysical simulation models such as Century, to construct economic simulation models that estimate economic potential for carbon sequestration. Using this method, simulations for the central United States show that reduction in fallow and conservation tillage adoption in the wheat-pasture system could generate up to about 1.7 million MgC/yr, whereas increased adoption of conservation tillage in the corn–soy–feed system could generate up to about 6.2 million MgC/yr at a price of $200/MgC. About half of this potential could be achieved at relatively low carbon prices (in the range of $50 per ton). The model used in this analysis produced estimates of economic potential for soil carbon sequestration potential similar to results produced by much more data-intensive, field-scale models, suggesting that this simpler, aggregate modeling approach can produce credible estimates of soil carbon sequestration potential. Carbon rates were found to vary substantially over the region. Using average carbon rates for the region, the model produced carbon sequestration estimates within about 10% of those based on county-specific carbon rates, suggesting that effects of spatial heterogeneity in carbon rates may average out over a large region such as the central United States. However, the average carbon rates produced large prediction errors for individual counties, showing that estimates of carbon rates do need to be matched to the spatial scale of analysis. Transaction costs were found to have a potentially important impact on soil carbon supply at low carbon prices, particularly when carbon rates are low, but this effect diminishes as carbon prices increase.

Unilateral CDM—can developing countries finance generation of greenhouse gas emission credits on their own?

The Clean Development Mechanism (CDM) was originally seen as an instrument with a bi- or multilateral character where an entity or fund from an industrialised country invests in a project in a developing country. The sluggish implementation of incentives for industrialised country companies to embark on CDM projects and low carbon prices led to a preference for just buying Certified Emission Reductions (CERs) instead of investing in projects. Thus a third option has gained prominence—the unilateral option where the project development is planned and financed within the developing country. We propose that a project should be called “pure unilateral” if it involves no foreign direct investment (FDI), only has the approval of the Designated National Authority (DNA) of the host country and sells its CERs after certification directly to an industrialised country. Unilateral projects can become attractive if the host country risk premium for foreign investors is high despite a high human, institutional and infrastructural capacity and domestic capital availability. Moreover, transaction costs can be reduced compared to foreign investments that have to overcome bureaucratic hurdles. On the other hand, technology transfer is likely to be lower, capacity building has to be undertaken by the host country and all risks have to be carried by host country entities. The potential to carry out unilateral CDM projects strongly varies among host countries. Whereas several countries from Asia and Latin America can design and implement projects autonomously, most of the Sub-Saharan countries rely on foreign support. International donors of capacity building grants should increasingly address those countries that are not presently focused on by foreign investors and support them in the design of local projects.

Carbon storage and emissions offset potential in an East African tropical rainforest

Forestry based carbon emissions offset projects have potential to both mitigate climate change and foster sustainable forest management. Degraded African tropical forests could sequester large amounts of additional carbon, but the lack of empirical data limits the feasibility of initiating carbon offset projects in many threatened forests. This study examines the potential to increase carbon stocks in the Kakamega National Forest of western Kenya, a threatened biodiversity hotspot and Kenya's only remaining rainforest. Carbon density values for indigenous forest and plantations were estimated based on forest inventory data from 95 randomized plots distributed throughout the forest. Total ecosystem carbon was estimated using allometric equations for tree biomass, destructive techniques for litter and herbaceous vegetation biomass, and Dumas combustion and spectroscopy for soils. Land cover maps for 1975, 1986, and 2000 were used to estimate both current carbon stocks and the influence of past land use changes. Mean carbon density in indigenous forest was 330 ± 65 Mg C/ha, greater than that of the forest's hardwood plantations (280 ± 77 Mg C/ha) and significantly greater that that of softwood plantations (250 ± 77 Mg C/ha). The distribution of carbon densities within the indigenous forest and the variation between plantation types suggest management practices could feasibly increase Kakamega's carbon stock. Deforestation between 1975 and 1986 and limited reforestation from 1986 to 2000 have resulted in a net loss of 0.4–0.6 Tg C. If this loss were reversed, the value of possible associated carbon credits dwarfs the current operational budget for managing and protecting the forest, even at low carbon prices. Additional income could help address resource needs of impoverished communities surrounding the forest and promote sustainable protection of Kakamega's high biodiversity.