Extending the Sectoral Coverage of an International Emission Trading Scheme

In a model inspired by the EU Emissions Trading Scheme, non-cooperative countries allocate their emissions to internationally trading and non-trading sectors. Each country is better off with trading than without, and aggregate welfare is maximized with all sectors in the trading scheme. We analyze the effects of extending the sectoral coverage of the trading scheme in a two-country model with quadratic abatement costs. If only the original trading sector is asymmetric between countries, the welfare change is always positive and the same in both countries. If the original and additional trading sectors are asymmetric, one country might lose, but there is an aggregate welfare gain. If the original trading sector and the non-trading sector are asymmetric, both countries always gain.     

The effectiveness of anti-leakage policies in the European Union: results for Austria

With the third trading period of the EU emissions trading scheme (EU ETS) starting in 2013, the system of allocating emission allowances will significantly change: In contrast to the previous two trading periods, auctioning of the allowances should now be the rule rather than the exception. Accompanying this policy change, concerns over competitiveness of energy intensive, trade exposed sectors as well as over limited environmental effectiveness via the channel of carbon leakage, have regained prominence. In this paper, we thus explore the impacts of potential EU policies to counter losses in international competitiveness and carbon leakage from the perspective of Austria. Based on numerical simulations with a computable general equilibrium model, we evaluate three policy options: an input subsidy for carbon allowances (thus reflecting the planned partially free allocation mechanism in the third EU ETS phase), a subsidy for domestic production, and an export rebate based on sectoral CO₂ costs. Our results show that each policy has the potential to support domestic production in exposed sectors relative to a full auctioning scenario and thus increase competitiveness. However, none is imperatively effective at reducing Austria’s net carbon emissions: while the carbon trade balance is improved and hence leakage declines, the tradability of emission permits within the EU ETS allows CO₂ emissions from Austria’s ETS output to increase. A cost benefit analysis indicates that the two policies promoting domestic output and exports are more cost effective than the CO₂ input subsidy.     

Hot air for sale: a quantitative assessment of Russia’s near-term climate policy options

Since January 2005 the European Union has launched an EU-internal emissions trading scheme (EU ETS) for emission-intensive installations as the central pillar to comply with the Kyoto Protocol. The EU ETS will be linked to a Kyoto emissions market where greenhouse gas emission allowances of signatory Kyoto countries can be traded. In this paper we investigate the implications of Russian market power for environmental effectiveness and regional compliance costs to the Kyoto Protocol taking into account potential linkages between the Kyoto emissions market and the EU ETS. We find that Russia may have incentives to join the EU ETS as long as the latter remains relatively separated from the Kyoto international emissions market. In this case, Russia can exert monopolistic price discrimination between two separated markets thereby maximizing revenues from hot air sales. The EU will be able to substantially reduce compliance costs if it does not restrain itself to EU-internal emission regulation schemes. However, part of the gains from extra-EU emissions trading will come at the expense of environmental effectiveness as (more) hot air will be drawn in.      

Efficiency losses from overlapping regulation of EU carbon emissions

In order to achieve their climate policy targets EU member states apply various regulatory instruments. We investigate the potential efficiency losses arising from the imposition of emission taxes on sectors that are covered by the EU Emissions Trading Scheme (EU ETS). Our analysis indicates the possibility of substantial excess cost through overlapping regulation. We show that unilateral emission taxes on sectors subject to the EU ETS are environmentally ineffective and increase overall compliance cost of the EU ETS.      

德国国家碳排放权交易体系初探

为落实减排承诺,实现2050年碳中和目标,德国联邦政府立法明确从2021年起引入国家碳排放权交易体系,针对未纳入欧盟碳市场的交通和建筑领域实施二氧化碳排放定价。本文通过介绍政策背景、交易基础和各要素情况,对比欧盟碳排放交易制度,初步探析德国即将实施的国家碳交易体系。     

Higher Price,Lower Costs? Minimum Prices in the EU Emissions Trading Scheme

In this paper, we examine the introduction of a price floor in an emissions trading system (ETS) when some emissions are regulated outside the ETS. We theoretically characterize the conditions under which a price floor enhances welfare. Using a numerical simulation model of the European Union (EU), we find that moderate minimum prices in the EU ETS can reduce the costs of EU climate policy by up to 30 percent. We also find that, because of tax‐interaction effects, the optimal minimum price in the EU ETS should be about four times higher than the average marginal abatement cost in non‐ETS sectors.     

Sectoral linking of carbon markets: A trade-theory analysis

The linking of emission trading systems (ETS) is a widely discussed policy option for future international cooperation on climate change. Benefits are expected from efficiency gains and the alleviation of concerns over competitiveness. However, from trade-theory it is known that due to general equilibrium effects and market distortions, linking may not always be beneficial for all participating countries. Following-up on this debate, we use a Ricardo-Viner type general equilibrium model to study the implications of sectoral linking on carbon emissions (‘leakage’), competitiveness, and welfare. By comparing pre- and post-linking equilibria, we show analytically how global emissions can increase if one of the ‘linked’ countries lacks an economy-wide emissions cap, although in case of a link across idiosyncratic sectors a decrease of emissions (‘anti-leakage’) is also possible. If – as a way to address concerns about competitiveness – a link between the EU ETS and a hypothetical US system is established, the partial emission coverage of the EU ETS can lead to the creation of new distortions between the non-covered domestic and international sector. Finally, we show how the welfare effect from linking can be decomposed into gains-from-trade and terms-of-trade contributions, and how the latter can make the overall effect ambiguous.     

欧盟碳排放交易发展最新趋势及其启示

欧盟碳排放交易体系是目前全球最完备、影响面最大的温室气体排放权交易市场,对其发展历程、有关经验教训的深入剖析,有助于指导我国的碳市场建立实践。通过对欧盟碳市场的发展历程、主要特点、市场效果等进行系统梳理,特别是对其最新动向与发展趋势进行了深入分析,并探讨欧盟碳市场的成功经验与不足之处,在此基础上,给出了对中国建立和发展碳排放交易体系的几点启示。     

Impacts of EU carbon emission trade directive on energy-intensive industries — Indicative micro-economic analyses

The cost impacts from the European emission trading system (ETS) on energy-intensive manufacturing industries have been investigated. The effects consist of direct costs associated to the CO₂ reduction requirements stated in the EU Directive, and of indirect costs of comparable magnitude that originate from a higher electricity price triggered by the ETS in the power sector. The total cost impacts remain below 2% of the production value for most industries within the ETS in the Kyoto period. In the post-Kyoto phase assuming a 30% CO₂ reduction, the total cost impact may raise up to 8% of production value in the heaviest industry sectors. In steel and cement industries the cost impacts are 3-4 fold compared to the least affected pulp and paper and oil refining. Electricity-intensive industries outside the ETS will also be affected, for example in aluminum and chlorine production the indirect cost impacts from ETS could come up to 10% of production value already in the Kyoto period. As industry sectors are affected differently by the ETS some correcting mechanisms may be worthwhile to consider in securing the operation of the most electricity-intensive sectors, e.g. balancing taxation schemes that may include as income source a levy on the wind-fall profits of the power sector due to ETS. A future improvement in ETS for industries within the scheme could be scaling of the emission reduction requirement so that the relative total emission reduction costs are at about the same level.     

Industry-level emission trading between power producers in the EU

This paper investigates how restrictions for emission trading to the energy-intensive power sector will affect the magnitude and distribution of abatement costs across EU countries vis-à-vis a comprehensive EU emission trading regime. It is found that emission trading between European power sectors allows the harvest of a major part of the efficiency gains provided by full trade as compared to strictly domestic action. However, trade restrictions may create a more unequal distribution of abatement costs across member states than is the case for a comprehensive trade regime. The reason for this is that restricted permit trade enhances secondary terms-of-trade benefits to EU member countries with low marginal abatement costs at the expense of the other EU member states.     

欧盟碳排放权交易体系第三阶段改革对碳价格的影响

欧盟碳排放权交易体系第三阶段改革成效显著,研究其关键改革政策对碳市场的影响,将为我国的碳市场建设提供一定的经验借鉴。本文选取了第三阶段三项主要改革政策——配额总量递减、折量拍卖、市场稳定储备机制作为评估对象,以第三阶段欧盟碳配额期货价格的日度数据为被解释变量,三大改革政策为解释变量,采用时间序列协整模型和向量误差修正模型对各因素的影响作出评估。研究结果表明,各项改革政策都与碳配额期货价格呈正向协整关系,通过改善市场供求失衡状况,有效推动了第三阶段碳价格的提高,对减排企业形成了长效的激励和约束,提高了欧盟碳排放权交易体系的运行效率。因此,我国在建立和完善碳排放权交易体系进程中,要根据本国情况合理设置配额总量和配额分配方式,设置配额柔性调整机制,不断提高市场流动性,促进碳价格的提高,保证碳排放权交易市场的稳定发展。     

Carbon Trading Reporting: The Case of Spanish Companies

Policy makers, scientists, industry leaders, and academicians all have debated how to restrain global warming and reduce greenhouse gas (GHG) emissions. Three main methods are used: command and control laws and regulations, carbon taxes, and cap and trade schemes. Recognizing the consequences of global warming, all Scandinavian countries introduced a carbon emissions tax in the 1990s. They also ratified the Kyoto Protocol that ran from 2005 through 2012. The European Union (EU) instituted a carbon trading scheme (Emissions Trading System (ETS)) in February 2005 when Kyoto became operative. The three Scandinavian EU members had two methods in place during the 2005–08 period to encourage GHG reduction: taxing and trading. Norway, not in the EU, used just taxes. The other EU members, including Spain, applied just the carbon trading ETS scheme to encourage compliance with the Kyoto Protocol. The fundamental issue addressed is this one: Did publicly held firms headquartered in Spain adequately report participation in the EU carbon emissions trading mechanism? Data to answer this question were obtained from the 2011 and 2012 annual reports for domestic Spanish public companies that received tradable emissions permits. In addition to assessing investor-owned firms’ disclosure posture, the specific method of reporting about carbon emissions permits, whether companies used, banked, or sold the permits granted by the government, also is reviewed. This empirical research effort reports on a complete survey of all available data for the two financial reporting periods that concluded the second phase of the Kyoto Protocol.     

Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs

International carbon offset certificates were cheaper than European Union Allowances, although they were substitutes within the EU Emissions Trading System (EU ETS). Thus, firms had a strong incentive to use offset certificates. However, a considerable number of firms did not exhaust their offset quota and, by doing so, seemingly forwent profits. While most literature on emissions trading evaluates the efficiency of regulation in a frictionless world, in practice firms incur costs when complying with regulation. In order to assess the relevance of trade-related fixed transaction costs, this study examines the use of international offset credits in the EU ETS. It establishes a model of firm decision under fixed (quantity-invariant) entry costs and estimates the size of such costs rationalizing firm behavior using semi-parametric binary quantile regressions. Comparing binary quantile results with probit estimates shows that high average transaction costs result from a strongly skewed underlying distribution. For most firms, the bulk of transaction costs stems from certificate trading in general, rather than additional participation in offset trading.     

Addressing leakage in the EU ETS: Border adjustment or output-based allocation?

The EU ETS has been criticised for threatening the competitiveness of European industry and generating carbon leakage, i.e. increasing foreign greenhouse gas emissions. Two main options have been put forward to tackle these concerns: border adjustments and output-based allocation, i.e. allocation of free allowances in proportion to current production. We compare various configurations of these two options, as well as a scenario with full auctioning and no border adjustment. Against this background, we develop a model of the main sectors covered by the EU ETS: electricity, steel, cement and aluminium. We conclude that the most efficient way to tackle leakage is auctioning with border adjustment, which generally induces a negative leakage (a spillover). This holds even if the border adjustment does not include indirect emissions, if it is based on EU (rather than foreign) specific emissions, or (for some values of the parameters) if it covers only imports. Another relatively efficient policy is to combine auctioning in the electricity sector and output-based allocation in exposed industries, especially if free allowances are given both for direct and indirect emissions, i.e. those generated by the generation of the electricity consumed. Although output-based allocation is generally less effective than border adjustment to tackle leakage, it is more effective to mitigate production losses in the sectors affected by the ETS, which may ease climate policy adoption.     

In or out: efficient inclusion of installations in an emissions trading scheme?

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.     

Home country bias in international emissions trading: Evidence from the EU ETS

We examine the pattern of allowance trades in the European Union Emissions Trading System (EU ETS) using highly disaggregated trading data and identify a significant and robust home market bias. Our results point to informational transactions costs that increase when trading across national borders. The existing trade pattern in goods and services explains two thirds of the home bias, with the remainder due to other causes. Our finding suggests that firms make use of existing trade networks to overcome search costs in bilateral allowance trade. Since the home bias differs across firms, it follows that marginal abatement costs are not equalized across market participants of the EU ETS.     

Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS

A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the dominant firm perceives market power in the permit market alone. I then examine the empirical evidence for price manipulation by the ten largest electricity firms during phase I of the EU ETS. I find that some firms’ excess allowance holdings are consistent with strategic price manipulation, and that they cannot be explained by price speculation or by precautionary purchases to insure against uncertain future emissions. My results suggest that market power is likely to be an empirically relevant concern during the early years of emission permit markets.     

EU-type carbon emissions trade and the distributional impact of overlapping emissions taxes

The European Union fulfills its emissions reductions commitments by means of an emissions trading scheme covering some part of each member state’s economy and by national emissions control in the rest of their economies. The member states also levy energy/emissions taxes overlapping with the trading scheme. We investigate the impact of that double regulation on the distribution of national welfares. In certain very special cases emissions tax increases turn out to be exactly offset by permit price reductions such that permit-exporting [permit-importing] countries lose [gain] from an increase in the overlapping emissions tax. These results are not general due to market-interdependence effects, which may even reverse the sign of welfare changes. For that ambiguity and other reasons the case is made for abolishing overlapping taxes.     

The Impact of the EU ETS on Prices,Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model

This paper analyses the impact of the EU Emissions Trading Scheme (ETS) on electricity prices, in particular on wholesale power markets across the EU. To study this impact, this paper discusses the major results of a bottom-up modelling analysis of the implications of emissions trading for the performance of the wholesale power market in 20 European countries. The analyses show that a significant part of the costs of (freely allocated) CO₂ emission allowances is passed through to power prices, resulting in higher electricity prices for consumers and additional (‘windfall’) profits for power producers, even in cases of full auctioning. In addition, they show that the ETS-induced increases in power prices depend not only on the level of CO₂ prices but also on the structure of the power market, i.e., the incidence of market power, and the price responsiveness of power demand. Finally, the analyses show that the internalization and pass-through of carbon costs are crucial elements in a policy regime to reduce CO₂ emissions by both changing the mix of power generation technologies and lowering total electricity demand.     

Shall One Sit “Longer” for a Free Lunch? Impact of Trading Durations on the Realized Variances and Volatility Spillovers

This study examines the effect of trading durations on the realized variance of rupee futures traded in national stock exchange (NSE), India and Dubai Gold & Commodities Exchange (DGCX), Dubai as there exists a difference in the trading durations at these exchanges, where DGCX has longer trading duration. The empirical results suggest that longer trading duration has significantly higher realized variance, and also non-trading durations at NSE account for higher overall realized variance of Rupee Futures. We model the impact of trading durations on intraday and overnight realized variance for rupee futures and estimate a reduced realized volatility of 40–70 bps due to shorter trading duration. We find that non-trading durations at National Stock Exchange account for 60–70% of the overall realized variance of rupee futures. Using MGARCH model with BEKK parameterization, we find evidence of bidirectional volatility spillover from Offshore to Onshore Rupee markets.