Implications of CO<Subscript>2</Subscript> emissions trading for short-run electricity market outcomes in northwest Europe

We examine the short-run implications of CO₂ trading for power production, prices, emissions, and generator profits in northwest Europe in 2005. Simulation results from a transmission-constrained oligopoly model are compared with theoretical analyses to quantify price increases and windfall profits earned by generators. The analyses indicate that the rates at which CO₂ costs are passed through to wholesale prices are affected by market competitiveness, merit order changes, and elasticities of demand and supply. Emissions trading results in large windfall profits, much but not all of which is due to free allocation of allowances. Profits also increase for some generators because their generation mix has low emissions, and so they benefit from electricity price increases. Most emission reductions appear to be due to demand response not generation redispatch.      

An experimental investigation of soft price caps in uniform price auction markets for wholesale electricity

This paper presents the results from an auction experiment using industry professionals and student participants who compete in a simulated wholesale market for electricity. Motivated by the intervention by FERC in response to the “meltdown” of the California spot market, we investigate the effect of including a “soft” price cap in a uniform price auction as a means of mitigating high prices. When prices are driven above the soft cap, offer curves become flat, in contrast to the hockey stick shape observed in a typical uniform price auction for electricity. This flat offer curve leads to market prices that are relatively insensitive to both generation costs and demand reductions.      

Modelling risk premia in CO2 allowances spot and futures prices

This article analyzes the modelling of risk premia in CO₂ allowances spot and futures prices, valid for compliance under the EU Emissions Trading Scheme (EU ETS). Similarly to electricity markets, a salient characteristic of CO₂ allowances is that the theory of storage does not hold, as CO₂ allowances only exist on the balance sheets of companies regulated by the scheme. The main result features positive time-varying risk premia in CO₂ spot and futures prices, which are strictly higher for post-2012 contracts (€6–9/ton of CO₂) than for Phase II contracts (€0–6/ton of CO₂). Contrary to Benth et al.'s (2008) for electricity markets, a positive relationship between risk premia and time-to-maturity is found in the EU ETS. As for relative differences between CO₂ futures and spot prices, CO₂ futures traded between + 1% (December 2008 contract) and + 33% (December 2014 contract) above spot prices during February 2008–April 2009. Contrary to Bessembinder and Lemmon (2002) for the electricity market, a positive relationship between risk premia and the variance/skewness of CO₂ spot prices is found. The futures-spot bias to the EU ETS explains around 1–6% of the variance of CO₂ futures premia.     

The impact of population on CO<Subscript>2</Subscript> emissions: evidence from European countries

This paper analyses the impact of population growth on CO₂ emissions in European Union countries. Traditionally, researchers have assumed a unitary elasticity of emissions with respect to population growth. In this study population is treated as a predictor in the model, instead of being included as part of the dependent variable (per capita emissions), thus relaxing the above-mentioned assumption of unitary elasticity. We also contribute to the existing literature by taking into account the presence of heterogeneity in the sample and considering a dynamic specification. The sample covers the period 1975–1999 for the current European Union members. Our results show that the impact of population growth on emissions is more than proportional for recent accession countries whereas for old EU members, the elasticity is lower than unity and non significant when the properties of the time series and the dynamics are correctly specified. The different impact of population change on CO₂ emissions for the current EU members should therefore be taken into account in future discussions of climate change policies within the EU.      

Carbon and energy prices under uncertainty: A theoretical analysis of fuel switching with heterogenous power plants

European power producers have a major influence on the EU ETS, given that both their CO₂ emissions and their EUA (European Union Allowance) allocations account for more than half of the total volumes of the scheme. Fuel switching is often considered as the main short-term abatement measure under the EU ETS. It consists in substituting combined cycle gas turbines (CCGTs) for hard-coal plants in power generation. Thereby coal plants run for shorter periods, and CO₂ emissions are reduced. This paper provides the first theoretical analysis of fuel switching, in a context where power plants involved are not equally efficient. We begin with a preliminary work using illustrative examples and sensitivity analyses, which enables us to observe how differences in the efficiency of power plants impact the cost of fuel switching, and how this is related to the level of switching effort. Based on this, we build a theoretical model taking into account the effect of differences in the efficiency of power plants involved in fuel switching. We also investigate the effect of the timing of fuel switching abatements, within the temporally defined environment of our dynamic model. Results demonstrate that the gas price and uncontrolled CO₂ emissions act together on the carbon price. We show that the influence of the gas price on the carbon price depends on the level of uncontrolled CO₂ emissions, due to heterogeneity of power plants that are used in the fuel switching process. Furthermore, we show that the time of occurrence of uncontrolled emissions matters so that shocks have a stronger impact when they occur in a period that is closed to the end of the phase.     

Do environmental benefits matter? Evidence from a choice experiment among house owners in Germany

Residential buildings strongly contribute to global CO₂ emissions due to the high energy demand for electricity and heating, particularly in industrialised countries. Within the EU, decentralised heat generation is of particular relevance for future climate policy, as its emissions are not covered by the EU ETS. We conducted a choice experiment concerning energy retrofits for existing houses in Germany. In the experiment, the approximately 400 sampled house owners could either choose a modern heating system or an improved thermal insulation for their home. We used standard and mixed logit specifications to analyse the choice data. We found environmental benefits to have a significant impact on choices of heating systems. However, they played no role in terms of insulation choices. Based on the estimated mixed logit model, we further obtained willingness-to-pay (WTP) measures for CO₂ savings.     

Promotion of Market Access for Renewable Energy in the Nordic Power Markets

This study investigates how renewable targets for the Nordic power market might be achieved at the lowest costs. The instruments investigated are fixed Feed-In Tariff, economically sound premium based Feed-In Tariff and shadow-prices for CO₂ emissions. We utilize a Real-Time Price based simulation model in the analysis. We show that even with strong assumptions regarding the Emission Permit Price the targeted level of wind power is not reached without Feed-In Tariffs. Emission Trading produces the lowest total emissions but with the highest total costs. From the studied instruments the most cost-efficient way to reach the targets for wind energy market shares is the premium based Feed-In Tariff. This tariff is also the most cost-efficient way to reduce CO₂ emissions.     

Abatement and Allocation in the Pilot Phase of the EU ETS

We use historical industrial emissions data to assess the level of abatement and over-allocation that took place across European countries during the pilot phase (2005–2007) of the European Union Emission Trading Scheme. Using a dynamic panel data model, we estimate the counter factual (business-as-usual) emissions scenario for EU member states. Comparing this baseline to allocated and verified emissions, we find that both over-allocation and abatement occurred, along with under-allocation and emissions inflation. Over the three trading years of the pilot phase we find over-allocation of approximately 280 million EUAs and total abatement of 247 Mt CO₂. However, we calculate that emissions inflation of approximately 73 Mt CO₂ also occurred, possibly due to uncertainty about future policy design features.     

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.     

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.     

Effective monitoring and mitigation in the organized wholesale electric power markets

The organized wholesale electric power markets in the United States are characterized by structural market power, and would not produce competitive results absent administrative intervention. Market power mitigation is a fundamental and permanent part of the market design for the organized wholesale electricity markets. Market power mitigation is essential to FERC’s policy of relying on competition to regulate electric wholesale power prices, consistent with its mandate under the Federal Power Act. Controversy has arisen about how to ensure that the markets clear on the basis of offers that have been determined to be competitive. Specifically, the issue is what institution and function is best situated to provide the initial critical determination about whether a participant’s offer is competitive. Despite recent clarification of FERC policies on the market monitoring function, the roles of market administrators and market monitors are a potential source of confusion and counterproductive institutional conflict. The FERC should refine and clarify its policy in this area by according exclusive responsibility to institutional, independent market monitors to monitor participants’ conduct and the potential for the exercise of market power through ex ante review of cost-based offers used in market power mitigation, subject to review by FERC.     

Abuse of EU Emissions Trading for Tacit Collusion

In this paper, we show that loopholes in EU emissions trading law foster tacit collusion that impacts oligopolistic product markets. The abuses originate from the covert misuse of EU emissions trading institutions, such as pooling or project-based mechanisms. We analyse two types of these loopholes by means of game theoretical methods to show how oligopolistic firms establish output restrictions, even if those firms are price takers on the~permit market (which might actually be the case for the majority of obligated firms in the EU). The identified misuse of emissions trading law increases firms’ profits, decreases the consumers’ surplus and has negative effects on social welfare for specified parameter ranges. Consequently, public authorities should not allow emissions trading’s overall good reputation—based upon its efficient abatement of pollution—to blind them to options in European emissions trading legislation that would eventually restrict competition.      

Methane and Nitrous Oxide Emissions from Agriculture in the EU: A Spatial Assessment of Sources and Abatement Costs

Agriculture significantly contributes to emissions of greenhouse gases in the EU. By using a farm-type, supply-side oriented, linear-programming model of the European agriculture, the baseline levels of methane and nitrous oxide emissions are assessed at the regional level in the EU-15. For a range of CO₂-equivalent prices, we assess the potential abatement, as well as the resulting optimal mix of emission sources in the total abatement. Furthermore, we show that the spatial variability of the abatement achieved at a given carbon price is large, indicating that abatement cost heterogeneity is a fundamental feature in the design of a mitigation policy. The cost savings permitted by market-based instruments relative to uniform standard are shown to be large.     

Analysis of European mobility surveys and their potential to support studies on the impact of electric vehicles on energy and infrastructure needs in Europe

Projections show that CO₂ emissions from road transport will continue to rise in the future if adequate policy measures are not implemented. Electrically driven vehicle (EDV) deployment is one way to reduce the CO₂ emissions. EDV drive and charge patterns determine the resulting electricity demand, emission reductions, future infrastructure requirements and the integration of non-dispatchable renewable electricity. In order to analyse the impact of EDVs on European energy and infrastructure needs, the driving patterns of potential EDV users should be analysed. Due to the lack of sufficient historical representative data on driving patterns with EDVs, this study analyses whether European national travel surveys (NTS) can be a potential data source to derive usage patterns for EDVs. We perform a meta-analysis of NTS from 9 European countries to assess their adequacy for analysing the impacts of EDVs on the European electricity system. Several gaps in data availability and comparability are identified. Except for the UK, European NTS are not detailed enough to assess EDV charging profiles, which is also due to the methodological differences used for NTS data collection in the various countries. We conclude that a dedicated survey needs to be developed to reliably estimate EDV charging profiles.     

Do German renewable energy resources affect prices and mitigate market power in the French electricity market ?

Several empirical studies show that renewable energy sources such as wind and solar power, typically supplied at low marginal cost, can cause electricity market prices to fall. Recent theoretical research and simulations also highlight the link between the integration of renewable energy and market performance in an oligopolistic energy market. This article looks at these dynamics in the context of cross-border effects between two highly interconnected electricity markets, France and Germany. Using a rich panel dataset for hourly data from November 2009 to July 2015, I estimate the impact of German wind and solar power production on both prices and market power in the French wholesale market. The findings highlight the importance of coordinating energy policies via joint renewable energy support schemes among interconnected European electricity markets.     

Economic Impacts of the 1997 EU Energy Tax: Simulations with Three EU-Wide Models

In March 1997 the European Commission adopted aproposal that increases existing minimum levels oftaxation on mineral oils by around 10 to 25% andintroduces excises for other energy products. Thispaper analyses the macroeconomic impacts of theproposal. It employs three models: HERMES, GEM-E3, andE3ME. All models confirm that the proposal will havepositive macroeconomic impacts when the tax revenuesare used to reduce social security contributions paidby employers. For the EU as a whole, both GDP andemployment are expected to be higher and CO₂emissions are 0.9 to 1.6 percent lower. The positiveEU-wide effects can be observed in practically allmember states. The sector impacts are modest, with theenergy sector expected to face the most negativeimpacts. Differences between model results are due tothe model type (general equilibrium ormacro-econometric), the EU countries covered and theway tax exemptions were handled. Crucial assumptionsto obtain the ``double dividend' are the modelling ofthe labour market and the impacts on EU externaltrade. The sensitivity of the results for the use oftax revenues, tax exemptions and tax rate increases isassessed.     

The impact of electricity prices on foreign direct investment: evidence from the European Union

We examine the impact of electricity price variation on net FDI (%GDP) inflows in countries of the European Union. We use panel data of 27 EU countries for a period of 2003 – 2013. We show that electricity prices of south-western and north-eastern EU countries did not converge to one price until now. Dynamic panel data analysis using system GMM shows that besides unit labour costs, tax rates and competitive disadvantage in secondary education, also higher electricity prices reduce countries’ ability to attract FDI. The immediate effects are statistically significant across both sub-regions analysed: in the short run, a 10% increase in electricity prices leads to a decrease in net FDI inflows as a share of GDP by 0.4 percentage points for the south-western and 0.33 for the north-eastern region. In the long run, the response is 0.60 percentage points for south-western and 0.48 for north-eastern regions. Policies should aim at reducing electricity market price differences on the European level through investment in transborder transmission capacity; reductions in FDI, when environmental policy increases after-tax electricity prices, should be countered by other tax reductions as well as harmonization of property rights, absence of corruption and labour market regulations at best-practice level.     

Efficiency and Income Shares in High‐Demand Energy Networks: Who Receives the Congestion Rents when a Line is Constrained?

We create an experimental spot market for electricity with demand side bidding, and use experimental methods to study the efficiency of the market and the income shares of the generators, wholesale buyers and transmission line operators. Nodal and line prices are computed on the basis of short run marginal costs, energy losses in transmission, and network opportunity costs when a line is constrained. We find that a traditional, competitive model, which yields congestion rents for the transmission line owners, does not explain the observed bidding behavior; and that subtle differences in institutional rules can cause changes in market efficiency.     

Empirical study on the determinants of CO2 emissions: evidence from OECD countries

This article empirically investigates the Environmental Kuznets Curve (EKC) for CO₂ emissions in the cases of 11 OECD countries by taking into account the role of nuclear energy in electricity production. The autoregressive distributed lag approach to cointegration is employed as the estimation method. Our results indicate that energy consumption has a positive impact on CO₂ emissions in most countries in the study. However, the impact of trade is not statistically significant. The results provide evidence for the role of nuclear power in reducing CO₂ emissions only in some countries. Additionally, although the estimated long-run coefficients of income and its square satisfy the EKC hypothesis in Finland, Japan, Korea and Spain, only Finland's EKC turning point is inside the sample period of the study, providing poor evidence in support of the EKC hypothesis.     

Market Power,Permit Allocation and Efficiency in Emission Permit Markets

Market power in permit markets has been examined in some detail following the seminal work of Hahn (Q J Econ 99(4):753–765, 1984), but the effect of free allocation on price manipulation with market power in both product and permit market has not been fully addressed. I show that in this case, the threshold of free allocation above which a dominant firm will set the permit price above its marginal abatement costs is below its optimal emissions in a competitive market, and that overall efficiency cannot be achieved by means of permit allocation alone. In addition to being of general economic interest, this issue is relevant in the context of the EU ETS. I find that the largest German, UK and Nordpool power generators received free allowances in excess of the derived threshold. Conditional on having price-setting power in both the electricity and permit markets, these firms would have found it profitable to manipulate the permit price upwards despite being net permit buyers.