Emission Market Research Articles

Buying green or producing green? Heterogeneous emitters’ strategic choices under a phased emission-trading scheme

Given the heterogeneous participants and temporal breaks involved in emission trading, it is reasonable to find permanent deviation of these markets from a rational expectation equilibrium (REE) status. However, the REE assumption underlies most existing studies, including those focused on the price-deviation phenomenon. They tend to ignore the heterogeneity among regulated firms, as well as the effects of such heterogeneity on emission trading, market equilibrium, and market efficiency. For the first time, we abandon the equilibrium assumption in the analysis of emission-trading markets and develop an artificial market in which regulated firms are modelled as heterogeneous agents with different allowance demands, abatement costs, technology preferences, and market expectations. Their behaviours are governed by a set of pre-specified rules, rather than directed by the economic optimization goals. The firms in China’s iron and steel sector are selected for simulation. Our results identify some phenomena that can hardly be explained under a REE framework: 1) carbon price significantly fluctuates and deviates from the REE value; 2) regulated firms tend to over invest in emission-abatement techniques, which further results in allowance over-supply in the markets; 3) while the emission-trading scheme does promote abatement actions among regulated firms, the theoretical arguments for its advantage in mitigation cost-saving seems illusionary. The artificial emission market establishment here may help policy makers better understand the irrational behaviours and phenomena in real-world emission trading, and thereby improve the design of emission- trading schemes.

An attempt to assess the monetary value of carbon absorbed in the Polish forest sector

Abstract Forests and forest management play a vital role in capture and storage of carbon dioxide, which contributes to mitigation of climate change. Forests are not only a natural carbon sink. Proper forest management can enhance biomass production, providing wood to be converted into e.g. construction timber, paper and furniture as well as wood fuels and, as a result, considerably enlarge this carbon sink. Poland, being a party of the Climate Convention and Kyoto Protocol and a member of the EU is obliged to provide yearly reports on carbon emissions and sequestration, including the Land Use, Land Use Change and Forestry (LULUCF) sector, of which forestry is the leading constituent. Forests, with the sequestration rate at a level of 3.93 t CO2·ha−1 form practically the only important carbon sink in the LULUCF category. Unfortunately the LULUCF sector has not been yet included in the current climate policy framework. The purpose of the study was an attempt to estimate the hypothetical value of carbon stored in forestry, resulting from the reported quantities of the emitted and sequestered carbon. The calculations were based on figures included in the National Inventory Report for Poland, reported yearly to the Secretariat of the Climate Convention. Among the forestry carbon sources/sinks, reported annually, the sequestration resulting from forest management significantly exceeds the net sequestration from afforestation/deforestation activities. Average data from recent years show that forest management is a net CO2 sink, with 12 Mt CO2·y−1 (above the forest management reference level, FMRL), and when combined with the carbon pool change resulting from afforestation/deforestation activities, it can be regarded as a net carbon sink sequestering nearly 15 Mt CO2·y−1. That value, when multiplied by the price of carbon emission allowance (e.g. EUA), could be a source of over 80 mill Euros per year, if used as a commodity on the emissions market. Due to high price volatility of CO2 emission allowances, the calculated profits are hypothetical, and the EU Emissions Trading System does not include forestry. These potential gains can become realistic after the LULUCF sector has been included in the emissions trading system.

Information Aggregation in Emissions Markets with Abatement

A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest of the market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.

Establishing National Carbon Emission Prices for China

The purpose of the paper is to establish national carbon emissions prices for the People’s Republic of China, which is one of the world’s largest producers of carbon emissions. Several measures have been undertaken to address climate change in China, including the establishment of a carbon trading system. Since 2013, eight regional carbon emissions markets have been established, namely Beijing, Shanghai, Guangdong, Shenzhen, Tianjin, Chongqing, Hubei and Fujian. The Central Government announced a national carbon emissions market, with power generation as the first industry to be considered. However, as carbon emissions prices in the eight regional markets are very different, for a variety of administrative reasons, it is essential to create a procedure for establishing a national carbon emissions price. The regional markets are pioneers, and their experience will play important roles in establishing a national carbon emissions market, with national prices based on regional prices, turnovers and volumes. The paper considers two sources of regional data for China’s carbon allowances, which are based on primary and secondary data sources, and compares their relative strengths and weaknesses. The paper establishes national carbon emissions prices based on the primary and secondary regional prices, for the first time, and compares both national prices and regional prices against each other. The carbon emission prices in Hubei, Guangdong, Shenzhen and Tianjin are highly correlated with the national prices based on the primary and secondary sources. Establishing national carbon emissions prices should be very helpful for the national carbon emissions market that is under construction in China, as well as for other regions and countries worldwide.

Analysis and Tests on Weak-Form Efficiency of the EU Carbon Emission Trading Market

This study separately applies Lo MacKinlay traditional variance ratio test, Wright non-parametric test, Chow Denning multiple variance ratio test and Joint Wright multiple variance ratio test to analyze and test the features of the EU carbon emission market and the results show that: in the 12-year development of the EU carbon emission trading, only the rate of return in the second stage follows the Martingale Process, showing a weak-form efficient market, while the first and third stages fail to possess features of an efficient market.

Modeling and forecasting the volatility of carbon emission market: The role of outliers, time-varying jumps and oil price risk

The objectives of this study are three-fold. First, we aim to assess whether outliers or extreme observations occur in the European Union Allowance (EUA) data. Second, we examine if time-varying jumps are present in the carbon emission market. Third, we use the crude oil volatility index (OVX) to investigate the effect of oil market uncertainty on the emission price volatility. In order to detect the possible outliers in the EUA market, we employ a standard methodology proposed by Ané et al. (2008) and identify several outliers in the emission data. After spotting and then removing those extreme points, we apply the GARCH-jump models to both original and outlier free observations. The results of the jump model show that while time-varying jumps do exist in the uncorrected data, most of the jump parameters, however, become insignificant in case of outlier-free observations. Next, the application of an extended EGARCH model, in which OVX is introduced in the GARCH specification, demonstrates that emission prices are highly sensitive to oil market implied volatility and that the impact of OVX on the EUA market appears to be asymmetric. Additionally, the use of forecast encompassing test documents that considering the outlier-free data and using the information content of OVX would improve the volatility forecasts for the carbon emission market. The results of our research carry important implications for both investors and policymakers.

Aggregated impact of allowance allocation and power dispatching on emission reduction

Climate change has become one of the most important issues for the sustainable development of social well-being. China has made great efforts in reducing CO2 emissions and promoting clean energy. Pilot Emission Trading Systems (ETSs) have been launched in two provinces and five cities in China, and a national level ETS will be implemented in the third quarter of 2017, with preparations for China’s national ETS now well under way. In the meantime, a new round of China’s electric power system reform has entered the implementation stage. Policy variables from both electricity and emission markets will impose potential risks on the operation of generation companies (GenCos). Under this situation, by selecting key variables in each domain, this paper analyzes the combined effects of different allowance allocation methods and power dispatching models on power system emission. Key parameters are set based on a provincial power system in China, and the case studies are conducted based on dynamic simulation platform for macro-energy systems (DSMES) software developed by the authors. The selected power dispatching models include planned dispatch, energy saving power generation dispatch and economic dispatch. The selected initial allowance allocation methods in the emission market include the grandfathering method based on historical emissions and the benchmarking method based on actual output. Based on the simulation results and discussions, several policy implications are highlighted to help to design an effective emission market in China.

Developing the Crypto Carbon Credit on Ethereum's Blockchain

This article proposes a decentralized solution towards capping greenhouse gas emissions by utilizing blockchain-based technology that will allow teams of academics to issue carbon credits as cryptocurrency. Ideally, these Crypto Carbon will be issued to individuals and organizations that verifiably cap greenhouse gas emissions anywhere in the world. The issued Credits can then be sold to businesses and nations that wish to offset their greenhouse gas emissions. This will have the effect of creating a decentralized emissions market.

The Economics of Enforcing Emissions Markets

AbstractThis article reviews the economic literature on enforcing emissions permit markets. This literature has produced hypotheses about firms’ compliance choices and permit market outcomes, tests...

Carbon Auctions, Energy Markets and Market Power: An Experimental Analysis

This paper provides an experimental analysis of a simultaneous energy-emissions market under conditions of market power. The experimental design employs real-world institutional features; including stochastic demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale. The results suggest that dominant firms can utilize energy-emissions market linkages to simultaneously inflate the price of energy and suppress the price of emissions allowances. Whereas under prior market designs, regulators were concerned with dominant firms exercising their market power over the emissions market to exclude rivals and manipulate the permit market by hoarding permits, the results of this paper suggest that this strategy is less profitable to dominant firms in contemporary auction-based markets than strategic capacity withholding in the energy market and associated demand reduction in the emissions market.

Impacts of International Lobby Groups on International Environmental Agreements

This paper is a theoretical study of the impact of international interest groups on the formation of an international market for emission permits. A three-stage non-cooperative game is considered. In the first stage, the governments decide on the formation of the international market. In the second stage, each country chooses the number of permits. In the third stage, the permits are traded. International and national lobbies try to influence governments in the first two stages. We find that in a pressured stance in favor of the international market, the formation of an international lobby group against an international market raises the contributions of national lobbies that support an international market well above the level that makes the governments indifferent. We also find that in the absence of the international market, the formation of an international green lobby group decreases both domestic and global emission levels. But if an international market is formed, the impact of international lobby groups is ambiguous.

Development of CO2 emissions futures market in the function of the companies’ stock market value growth

The papers investigates the influence of futures market development and green product trading on companies’ share prices on global markets. Green markets are nowadays characterized by rapid growth and development which particularly refers to CO2 emissions market. The basic objective of the paper is to analyze the current level of development of the emissions market growth in Europe and expand the theoretical understanding of futures trading with this type of products. As an important indicator of new products and tendencies in commodity futures market trading, the paper examines the impact of futures trading on CO2 on European Energy Exchange (EEX) and market value of companies’ shares from the sectors of energy and mining, transport, processing industry and financial services. Starting from the fact that market value indicators provide shareholders with necessary information, such as return on investment, the basic micro fundamental indicators have been chosen: average share price, EPS, P/E ratio, P/B ratio, and market capitalization. The results obtained confirm the knowledge that CO2 emissions trading on the futures market does not have the same impact on every market values indicator of a company and that it varies by analyzed sectors.

A Perspective of Evolution for Carbon Emissions Trading Market: The Dilemma between Market Scale and Government Regulation

Which means are more effective for reducing carbon emission? Our paper argues the effect of the government regulation and the market trading on the carbon emission. Based on our model, we obtain three conclusions as follows. First, government strengthened regulation can encourage firms to participate in the trading market for carbon emission. Second, there is the negative relation of supervision cost to trading price. Third, there is an alternative relationship between the scale economy level of the supervisory authority and that of the carbon emissions market. Meanwhile, our numerical simulations also confirm our results for our model analyses.

Carbon Auction Revenue and Market Power: An Experimental Analysis

State and regional governments in the U.S. and abroad are looking to market-based approaches to mitigating greenhouse gas emissions from the electric sector, and in the U.S. as a compliance approach to meeting the aggressive targets of the Environmental Protection Agency (EPA)’s Clean Power Plan. Auction-based approaches, like those used in the Northeast U.S. and California, are both recommended strategies under the Plan and attractive to state governments because they can generate significant revenue from the sale of emissions permits. However, given the nature of imperfect competition in existing electricity markets, particularly at the state and regional level, the issue of market power is a concern at the forefront. This paper provides the results from a controlled laboratory experiment of an auction-based emissions market in the electricity sector. The results show that government revenue from auctioning emissions permits is substantially lower when market concentration is only moderately increased. The results hold significant implications for states and other subnational governments that have high revenue expectations from the auctioning of emissions permits.

Sentiment Effects in the European Emissions Market

The pricing of European emissions allowances (EUAs) is complicated by the market being driven by not just financial and economic factors, but also the harder-to-gauge uncertain influences of politics and policy. Drawing on a well-established literature showing sentiment to play an expanded role in investment decision-making in the face of uncertainty, we develop a social media sentiment measure through aggregating pertinent Twitter posts about European emissions. Our sentiment measure is significantly predictive of EUA price and price volatility movements. This relationship is shown using hourly intra-day sentiment and price measures for the final year of the December 2013 EUA futures contract. For prices and returns we demonstrate that there is bi-directional Granger causality between changes in sentiment and changes in EUA prices, and we establish that periods of strong (weak) sentiment correspond with periods of high (low) EUA return volatility. These findings demonstrate that sentiment matters in EUA pricing, that it can be measured using social media, and more broadly suggest that sentiment should matter in other young asset markets with scope for uncertain political interference and policy developments.

The effects of different CCS technological scenarios on EU low-carbon generation mix

Carbon capture and storage technology (CCS), a technology to reduce the emissions in coal and gas power generation plants, will play an important role in the achievement of the European Union emissions reduction objective. In the European Union, energy policies are articulated around three different elements: measures to promote renewable energy technologies, the emissions certificates system and both energy-saving and energy-efficiency policies. The succession of directives and communications from the EU Commission on renewable technology generation share targets and the implementation of the European Emissions Market exemplify the serious EU commitment to a more environmentally friendly future. CCS technologies—together with RES technologies—are thus key to achieve the European emissions reduction target. Although the CCS commercial availability is not guaranteed—due to a slow technological development—some institutions, such as the Institute for Prospective Technological Studies, assume, for 2030 horizon, a quick development of this technology, growing until a maximum participation of an 18 % over the fossil fuels total generation. An eventual non-availability of these technologies in 2030 could increase the cost of this objective in a 70 %. Therefore, the achievement of pollutant emissions reduction targets depends on a correct design of the European generation technologies mix, which should include CCS technologies. Nevertheless, the uncertainty about the final costs and economic risk of these technologies makes a question about their future role to arise. This paper analyses the effects of different variations in the cost and risk of the CCS technologies (scenarios) over the European power technologies mix. The results confirm the need of the availability of these technologies in 2030, beyond the potential costs and risks of both options. The reason lies in the methodological approach of portfolio theory, which allows an analysis from an efficient portfolio point of view.

Status of Korea ETS and Strategies to improve in One Year After Launching - Through Comparing with EU ETS -

Korea has introduced Korea Emissions Trading Scheme (Korea ETS) since 2015. However, not many companies voluntarily participate in the emissions trading. The goal of this paper is to provide the way to improve the Korea ETS. This study compares the Korea ETS with EU Emissions Trading System, which has been practiced for a decade, and suggests three strategies to activate the Korea Emissions Trading Scheme. The first thing is to encourage more companies to participate in the emissions trading since the number of companies in the emissions trading in Korea is quite limited compared with that of EU. The second thing is to activate the trading of Korean Credit Unit in order to stimulate various emission reduction mechanisms. Currently, the most of the trading in the emissions market is through the Korean Allowance Unit. The third thing is to establish concrete measures to continuously improve the Korea ETS. A comprehensive evaluation of the Korea ETS is needed along with the ongoing convergence with the associated comments. The improvement of Korea ETS would be one of the most efficient ways to compete the climate change, and would also play a role to raise the status of Korea.

Environment and economic risk: An analysis of carbon emission market and portfolio management

Climate change has been one of the biggest and most controversial environmental issues of our times. It affects the global economy, environment and human health. Many researchers find that carbon dioxide (CO2) has contributed the most to climate change between 1750 and 2005. In this study, the orthogonal GARCH (OGARCH) model is applied to examine the time-varying correlations in European CO2 allowance, crude oil and stock markets in US, Europe and China during the Protocol's first commitment period. The results show that the correlations between EUA carbon spot price and the equity markets are higher and more volatile in US and Europe than in China. Then the optimal portfolios consisting these five time series are selected by Mean-Variance and Mean-CVAR models. It shows that the optimal portfolio selected by MV-OGARCH model has the best performance.

Understanding carbon trading: Effects of delegating CO2 responsibility on organizations’ trading behaviour

The establishment of a carbon market assumes that there is an effective means of transforming price information into technical carbon reduction measures. However, empirical evidence reveals that the links between price information and carbon management strategies are far from obvious. To understand how delegating CO2 responsibility affects CO2 trading behaviour, this article proposes a neo-institutionalist approach to answering the question of why companies became sellers, buyers or a combination of both during phase I of the European Emissions Trading Scheme (EU ETS). Original data from a survey on companies that participated in this scheme were collected and analysed. It was assumed that the trading scheme offered two ways to delegate decisions regarding emissions trading: decoupling from technical knowledge and financialization (i.e. delegating to financial departments) or coupling using technicalization (i.e. delegating to manufacturing departments). The results support the hypothesis that a company that adopts a decoupling strategy is more likely to buy certificates to fulfil their emissions targets. Adopting a coupling strategy indicates that a company is more likely to become a seller, all else equal. Professional identity is the theoretical basis for this relationship. Delegating carbon management to different departments represents either a stronger coupling or a stronger decoupling from core technological processes.Policy relevanceThe transaction data from phase I of the EU ETS open new questions and possibilities regarding the reasons that drive selling and buying in companies. It is important to look not only at the traditional sources of transaction costs, but rather also at the reasons for these tensions. One important source is the professional education of the people in charge of the EU ETS. Tailored information that directly addresses the different professional backgrounds of managers working in both financial departments and more technical departments might help to lower these types of transaction costs. In today's context, important emitter countries, such as China and Korea, have launched their own emissions markets, copying many aspects of the EU ETS. For the positive development of these markets and as a way of establishing a global emissions market, these new schemes should learn from the EU ETS experience.

Analysis and Test of Multifractal Characteristics of the European Carbon Emissions Market—Based on the Framework of Wavelet Leaders

In order to depict the complex price volatility of carbon emission permits under the European Union Emission Trading Scheme (EU ETS) accurately, we use the multifractal analysis based on wavelet leaders to extract the useful information from the carbon price series in this paper. Firstly, we test the multifractal property of the EU carbon market, and the empirical results show that the three phases of the EU ETS have shown significant multifractal characteristics. Compared with the other two phases, the multifractal characteristics of phase three are the strongest and the prices are the most uneven. Then, based on the width of the multifractal spectrum and the variances of the Hausdorff dimension, we innovatively propose an indicator VhS which has been proved to be effective in depicting the price volatility of the European carbon market. This paper provides a new train of thought for the risk identification and management in the multifractal market.