Emission Allowance Prices Research Articles

Measuring the Vulnerability of an Energy Intensive Sector to the EU ETS under a Life Cycle Approach: The Case of the Chlor-Alkali Industry

The EU Emissions Trading System (EU ETS), which is a cornerstone of the EU’s policy to combat climate change, has been criticised by its effects on the competitiveness of intensive energy demanding industries, and in particular, of the chlor-alkali sector. The main chlorine application in Europe is the production of polyvinyl chloride (PVC) from ethylene dichloride (EDC) as intermediate. Since chlorine is mainly traded in terms of derivatives, the aim of this work is to assess the vulnerability of the European chlor-alkali industry to chlorine replacement by imported EDC. An Energetic, Economic and Environmental Sustainability Assessment (EEESA) methodology is proposed based on the main variables affecting EDC production. Moreover, the influence of the EU ETS compensation measures and the emission allowance price in the current (mercury, diaphragm and membrane) and emergent (oxygen-depolarized cathodes (ODC)) technologies is studied. The most vulnerable scenarios become mercury and diaphragm technologies due to energy consumption. However, the salt price dependency on the quality requirements substantially influences the EEESA results. This analysis also shows the importance of hydrogen valorisation, whose major impact is observed in ODC scenario.

Thermodynamic and economic analysis of nuclear power unit operating in partial cogeneration mode to produce electricity and district heat

This paper presents the methodology of techno-economic analysis for a nuclear unit operating in partial cogeneration mode and its application for the case study: a nuclear power plant planned in Poland. The research objectives were: to propose EPR, AP1000 and ESBWR nuclear condensing-extraction turbine systems modifications required for operation in cogeneration, to determine optimal heat production and heat transport line (HTL) parameters, to evaluate the technological feasibility of proposed solutions, to analyze profitability and competitiveness of the system versus coal-fired technologies. To adapt nuclear turbine to operation in partial cogeneration mode, the steam must be extracted from low-pressure (LP) section of the turbine and crossover pipe connecting high-pressure (HP) or intermediate-pressure (IP) section with LP section. Thermodynamic analysis proved that the operation of nuclear power plant at peak thermal load up to 250 MW neither requires to change primary cycle arrangements of considered nuclear units nor thermal capacities of nuclear reactors. Total annual costs of nuclear power plant operating in partial cogeneration were the lowest of all considered heat and power options, with all types of reactors, for the emission allowance price of 27 EUR/t CO2-eq. The specific cost of heat from nuclear cogeneration option was 10.3–12.7 EUR/GJ.

The response of the Beijing carbon emissions allowance price (BJC) to macroeconomic and energy price indices

In 2013, China opened pilot carbon emission trading markets in seven provinces, where carbon emission allowances have now been traded for more than two years. In this paper, we employ a structural VAR model and the price of the Beijing carbon emission allowance to study the dynamic relationships among the price of the carbon emission allowance, economic development and the price of energy. This paper's data cover the period from April 2, 2014 to November 6, 2015. This paper provides information that will be helpful to both investors and governmental policy makers. The results show that (1) an increase of one standard deviation in the coal price leads to an initial increase of approximately 0.1% in the Beijing carbon price. After 2 days, there is a decrease of less than 0.1%, and the price gradually increases by approximately 0.1% after 30 days; (2) the price of the Beijing carbon emission allowance is mainly affected by its own historical price; (3) the Beijing carbon emission allowance price, crude oil price, natural gas price and economic development have positive – albeit non-significant – correlations.

Emission trading and carbon market performance in Shenzhen, China

China has developed its own domestic carbon markets by setting up emission trading schemes. This study addresses concerns about the functioning of these schemes and the financial performance of the Chinese carbon market. It aims to assess an actual outcome of this policy intervention, i.e. trading records, which were used in our analysis to examine a key financial property of the allowance-based market in Shenzhen. In a mature market, assets that incur higher risks are likely to yield higher returns, i.e. a positive relationship. To examine this property, we solicited historical data on the price and trading volume of emission allowances. We statistically estimated the degree of volatility in the Shenzhen market and its relationship with expected return premium. We found that the rate of return was negatively associated with expected risk. This stands at odds with the usual expectation in the financial market and the prediction of asset pricing theory. Also, kurtosis in trading volume was excessively high and its fluctuations were highly concentrated. We discuss these findings in terms of market liquidity and information uncertainties, and offer some policy recommendations. More regulatory attention and economic fixes are needed to improve market efficiency and eliminate sources of market distortions.

Factors behind the development of forest chips use and pricing in Finland

In this study, factors were analysed that had an effect on the development of forest chips use and mill gate price from 2007 to 2016 in Finland. During this period the average price of forest chips has increased by 66% from 12.66 € MWh−1 to 20.69 € MWh−1. The competitiveness of forest chips use was the result of different incentives, price and taxation of competing fuels such as peat and fossil fuels, and the price of emission allowances. The sliding premium tariff bound to the price of emission allowances and excise tax of peat fuel had a straightforward effect on the price formulation of forest chips. During the reference period, both incentives and taxation levels were updated several times to implement the national objective set by the EU on increasing the utilisation of renewable sources. The future demand of forest chips is dependent on the price development of emission allowances and electricity. Their current low price has become a significant threat to CHP-plant investment activity. Policy regulation is needed to enable bioenergy CHP investments, which will also secure energy infrastructure and energy security in the future in Finland.

Impacts on CO2 Emission Allowance Prices in China: A Quantile Regression Analysis of the Shanghai Emission Trading Scheme

A pilot regional carbon emission trading scheme (ETS) has been implemented in China for more than two years. An investigation into the impacts of different factors on carbon dioxide (CO2) emission allowance prices provides guidance for price-making in 2017 when the nation-wide ETS of China will be established. This paper adopts a quantile regression approach to estimate the impacts of different factors in Shanghai emission trading scheme (SH-ETS), namely, economic growth, energy prices and temperature. The empirical analysis shows that: (i) the economic growth in Shanghai leads to a drop in the carbon allowance prices; (ii) the oil price has a slightly positive effect on the allowance prices regardless of the ordinary least squares (OLS) or quantile regression method; (iii) a long-run negative relationship exists between the coal price and the Shanghai emission allowances (SHEA) prices, but a positive interaction under different quantiles, especially the 25%–50% quantiles; (iv) temperature has a significantly positive effect at the 20%–30% quantiles and a conspicuous negative impact at the right tail of the allowances prices.

Trader types and volatility of emission allowance prices. Evidence from EU ETS Phase I

This paper studies the relation between the trading activity of market participants and the volatility of the European Emission Allowance price during Phase I of the European Union Emission Trading System (EU ETS). We focus on the contrasting roles of different trader types.We find evidence of a positive and significant trading activity–volatility relation, which appears to be stronger when accounting for trader type. The positive relation can be mainly attributed to energy providers. In contrast, industrial companies seem to have traded more frequently when volatility levels were lower. Finally, the non-liable players, represented by financial intermediaries, appear to have acted as a flexible counterparty, trading more with the energy sector when volatility was higher, and more with the industrial firms when volatility was lower. We discuss possible explanations for these contrasted positions.Understanding the trading activity–volatility link is relevant for evaluating the efficiency of the EU ETS. Although the relation is generally positive, many players remained often inactive and traded mostly when volatility levels were lower. Policies targeting the engagement of less active players could lead to a smoother incorporation of information into prices and to an increase in market efficiency.

Paying the full price of steel – Perspectives on the cost of reducing carbon dioxide emissions from the steel industry

This study examines the impacts felt downstream of carbon pricing and investments made in CO2 abatement within the steel industry. Using the supply of steel to a passenger car as a case study, the effects of a steel price increase on cost structures and price at each step of the supply chain were assessed. Since the prices of emission allowances under the European Union Emissions Trading System fall well below those required to unlock investments in low-CO2 production processes in the integrated steelmaking industry this paper seeks to pave the way for a discussion on complementary policy options. The results of the analysis suggest that passing on the compliance costs of the steel industry would have only marginal impacts on costs and prices for the end-use sectors (e.g., on the production cost or selling price of the passenger car). Under the assumptions made herein, at a carbon price of 100 €/tCO2, the retail price of a mid-sized European passenger car would have to be increased by approximately 100–125 €/car (<0.5%) to cover the projected increases in steel production costs.

Stochastic volatility of the futures prices of emission allowances: A Bayesian approach

Abstract Understanding the stochastic nature of the spot volatility of emission allowances is crucial for risk management in emissions markets. In this study, by adopting a stochastic volatility model with or without jumps to represent the dynamics of European Union Allowances (EUA) futures prices, we estimate the daily volatilities and model parameters by using the Markov Chain Monte Carlo method for stochastic volatility (SV), stochastic volatility with return jumps (SVJ) and stochastic volatility with correlated jumps (SVCJ) models. Our empirical results reveal three important features of emissions markets. First, the data presented herein suggest that EUA futures prices exhibit significant stochastic volatility. Second, the leverage effect is noticeable regardless of whether or not jumps are included. Third, the inclusion of jumps has a significant impact on the estimation of the volatility dynamics. Finally, the market becomes very volatile and large jumps occur at the beginning of a new phase. These findings are important for policy makers and regulators.

Modelling long-term technological transition of Polish power system using MARKAL: Emission trade impact

The need for technological transition of electricity production becomes a global problem. However, in coal-dominated Polish power system this need is even more crucial than anywhere, since technical lifetime of the most domestic power plants is ending. In this paper, the impact of the EU Emission Trading Scheme (EU ETS) for CO2 combined with sulfur dioxide (SO2) and nitrogen oxides (NOx) emission trading mechanism on power technology choice was studied using Market Allocation (MARKAL) model of Polish power system. Poland can contribute to achieving ambitious EU CO2 emission reduction goals to 2050 by switching to diversified electricity mix of low-carbon coal technologies with CCS, and carbon-free options e.g. nuclear, biomass IGCC, wind onshore and offshore. This ‘low-carbon’ mix can be achieved only at high emission allowance prices, stimulated by the introduction of Market Stability Reserve to EU ETS and successive decrease in EU CO2 emission cap. At high emission allowance prices, Poland's CO2 emissions from ETS-participating electricity generating plants are expected to decrease in 2010–2050 period by 96–99%, depending on the projected electricity consumption. Model results prove that SO2/NOx emission trading scheme, envisaged in Poland, is not effective, in view of Industrial Emission Directive implementation, and should be reconsidered.

Managing the costs of CO2 abatement in the cement industry

This article investigates how the costs associated with deep reductions in CO2 emissions from the cement industry will influence the costs across the entire value chain from cement production to the eventual end-use, in this case a residential building. The work is motivated by the substantial difference between the pricing of CO2 emissions and the costs of mitigation at the production sites of energy-intensive industries, such as cement manufacture. By examining how CO2 trading and investments in low-carbon kiln systems affect costs and prices further up the supply chain of cement our analysis provides new perspectives on the costs of industry abatement of CO2 and on the question of who could or should pay the price of such abatement. The analysis reveals that the cost impacts decrease substantially at each transformation stage, from limestone to final end-uses. The increase in total production costs for the residential building used as the case study in this work is limited to 1%, even in the cases where the cement price is assumed to be almost doubled.Policy relevanceWith the price of emission allowances under the EU Emissions Trading System (EU ETS) currently far below the levels required to unlock investments in low-CO2 production processes in carbon-intensive industry (i.e. petroleum refining, iron and steel production and cement manufacturing), this article seeks to pave the way for a discussion on complementary policy options. The results from this study, using the supply of cement and concrete to a residential building as a case study, suggest that because cement and concrete typically account for a limited proportion of the total cost of most construction and civil engineering projects, a policy scheme designed to allocate more of the costs of CO2 abatement to the end-users (of cement) would neither (significantly) alter the cost structure nor (dramatically) increase overall project costs.

Implications of an energy efficiency obligation scheme for the Swedish energy-intensive industries: an evaluation of costs and benefits

The EU Energy Efficiency Directive (EED) aims at improving energy efficiency by implementing actions in all sectors of the economy in the EU. Article 7 of the EED sets the target of 1.5 % cumulative annual energy end-use savings. An energy efficiency obligation scheme (EEO) is one of the policy mechanisms proposed to reach this target. This paper assesses the impact of implementing a Swedish EEO and the implications that such a scheme may have for Swedish energy-intensive industries. The assessment was based on cost-benefit analysis (CBA) methodology. The benefit-to-cost ratio (BCR) ranges from 1.56 to 2.17 and the break-even cost ranges from 83.3 to 86.9 €/MWh with sensitivity analyses performed for the emission allowance prices and eventual costs of the EEO. The annual energy savings potential is estimated to be 1.25 TWh/year. A Swedish EEO could motivate investments in energy efficiency measures and thus help Sweden reach the energy efficiency targets set in the EED.

Cross-Commodity News Transmission and Volatility Spillovers in the German Energy Markets

This study investigates the dynamic interrelations in the volatilities and correlations of the returns on the German energy forward markets. We focus on the volatility spillovers to electric power from news in the prices of gas, coal, and carbon emission allowances. We discuss the relationship between our results and the fundamental developments in the energy markets during the sample period from 2008 to 2013, particularly the changes over time in spark and dark spreads and in the actual generation mix. We use a general VAR-BEKK model and a variance impulse-response function to analyze and evaluate the spillover effects. Special attention is paid to selecting an appropriate econometric volatility model. Our results show that spillover effects display significant time variation. Spillovers from coal to power are significant throughout our sample, while spillover from gas decreased during the most recent period. In contrast, we find that spillovers from carbon have increased in strength over time. These results are consistent with the developments in these markets during the sample period.

Equity Implications of the COP21 Intended Nationally Determined Contributions to Reduce Greenhouse Gas Emissions

The recent Conference of the Parties to the UN Framework Convention on Climate Change (COP21) resulted in voluntary greenhouse gas (GHG) reduction commitments by 195 countries. The purpose of this paper is to analyze the equity implications of this “bottom-up” approach to climate change negotiations in two major ways. First we analyze the GHG reduction targets specified in the COP 21 agreement prior to any emissions trading in terms of the equity metrics of the Gini Coefficient and Atkinson Index. We also match the commitments with specific equity principles, such as the Egalitarian, Ability to Pay, Vertical, and Horizontal equity. Second, we analyze the equity and economic welfare outcomes after emissions trading takes place. We adapt a non-linear programming model well suited to this purpose, which determines the equilibrium emission allowance price, mitigation costs, and allowance purchases and sales between countries from trading. We also test the sensitivity of the results to macroeconomic conditions and technological change. Our findings are that the GHG reduction commitments made at COP 21 run counter to most equity principles. They are definitely a major departure from the Egalitarian, Vertical, and Rawlsian equity principles proposed for many years by developing countries.

Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve

We report on laboratory experiments, with financially motivated participants, comparing alternative proposals for managing the time path of emission allowance prices in the face of random firm-specific and market-level structural shocks. Market outcome measures such as social surplus and price variability are improved by the use of a price collar (auction reserve price and soft price cap). Comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances. In some specifications, the quantity collar performed worse than no stabilization policy at all. The experiment implemented a specific set of structural elements, and extrapolation to other settings should be done with caution. Nevertheless, an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important (although perhaps not exclusive) role to play in constructing an effective market stability policy.

Economic efficiency of coal gasification in Poland in reference to the price of CO2emission rights

The article presents the impact of prices of carbon dioxide on the economic efficiency of 14 coal gasification technologies employed for producing electricity, hydrogen and methanol measured with the use of NPV method. All technical, technological and economic assumptions in the assessment have been made for Polish conditions. The impact of CO2 prices were examined in the range of 30-200 PLN/Mg. The production capacity of the base technology corresponds with the fuel consumption of indicative coal having the calorific value of 20.5 GJ/Mg, used in the amount of 100 Mg/h. On the basis of the conducted research, with respect to all technical and economic assumptions, it can be stated that for the base scale there is a clear impact of prices of CO2 emission allowances above the 90 PLN/Mg CO2 . Such a level of carbon dioxide prices makes the decision concerning construction of geological sequestration systems (CCS, carbon capture and storage) worthwhile. This applies in particular to the production of electric energy. For the variants focused on hydrogen production there is a dominance of variants with CCS system only at the price exceeding 120 PLN/Mg CO2 , and in the case of methanol such a situation occurs above 150 PLN/Mg CO2 .

Techno-economic analysis of four concepts for thermal decomposition of methane: Reduction of CO2 emissions in natural gas combustion

This paper presents a techno-economic analysis of four concepts that apply the thermal decomposition of methane (TDM) with the aim of reducing carbon dioxide emissions in natural gas combustion. Different technical solutions are applied to convert methane in natural gas to gaseous hydrogen, which is combusted to produce electricity with a steam power cycle, and solid carbon, which is assumed to be sold as carbon black. The cost of electricity production and the potential to reduce CO2 emissions in each concept were evaluated and compared to the reference case of direct methane combustion. With a moderate emission allowance price (20€/tCO2) and product carbon price (500€/tcarbon) the cost of electricity production in the concepts was 12–58% higher than in the reference case. However, the price of product carbon had a significant effect on the feasibility of the concepts. Thus, the methane burner, which showed the best performance, produced 17% less CO2 emissions per MWhe and had a smaller cost of electricity production than the reference case already with the carbon price of 600–700€/tcarbon.

Operating Activities of Energy Companies in the Context of Crude Oil Risk and its Impact on the Polish Power Exchange

Different factors have significant impact on the development of the Polish Power Exchange and the volatility of electricity contracts prices, which are quoted on this part of energy market. The electricity prices are strongly influenced by such determinants as: the level of turnover volume, fuel prices, weather conditions, the CO2 emission allowance prices, political situation, the changeability of the energy demand level. The purpose of this paper is to examine and compare the volatility behaviour of world crude oil prices and electricity prices established on the Polish Power Exchange (POLPX) in the turbulent period, which covers the subprime financial crisis, geopolitical crisis, and changes in the rules of the European Union's energy policy. The background for the empirical research is a comparative analysis of business strategies of Polish energy companies and their adaptation to the factors that in the significant way influence the development of energy sector in Poland.

Detecting and modelling the jump risk of CO2 emission allowances and their impact on the valuation of option on futures contracts

Modelling CO2 emission allowance prices is important for pricing CO2 emission allowance linked assets in the emissions trading scheme (ETS). Some statistical properties of CO2 emission allowance prices have been discovered in the literature ignoring price jumps. By employing real data from the ETS, this research first detects the jump risk using a jump test and then verifies jump effects in modelling CO2 emission allowance prices by comparing the in-sample and out-of-sample model performance. We suggest a model which can capture the statistical properties of autocorrelation, volatility clustering and jump effects is more appropriate for modelling CO2 emission allowance prices. We establish a general framework for pricing CO2 emission allowance options on futures contracts with these properties and find that the jump risk significantly affects the value of the CO2 emission allowance option on futures contracts. More importantly, we demonstrate that the dynamic jump ARMA–GARCH model can provide more accurate valuations of the CO2 emission allowance options on futures than other models in terms of pricing error.

Time variation in European carbon pass-through rates in electricity futures prices

The European Union Emissions Trading Scheme is a means to price emission allowances. Electricity market prices should reflect these market prices of emission allowances as they are a cost factor for power producers. The pass-through rate is the fraction of the emission allowance price that is passed through to electricity market prices. It is often measured and presented as an average or a fixed estimate over some time period. However, we expect that the pass-through rates should actually vary over time as electricity supply curves reflect the marginal costs of different producers that differ in emission intensity. We apply a Kalman Filter approach to observe pass-through rates in Germany and U.K. and find strong support for time varying instead of fixed pass-through rates. Although policy makers are interested in the impact of a policy on average, our results indicate that one needs to be careful with the time-frame over which pass-through rates are measured for policy evaluation, as an incorrect chosen evaluation period could cause an under- or overestimation of the pass-through rate. In addition, our model helps to provide policy makers with insight in the development of pass-through rates when market circumstances change with respect to power production.