Valuation of marginal CO2 abatement options for electric power plants in Korea

The electricity generation sector in Korea is under pressure to mitigate greenhouse gases as directed by the Kyoto Protocol. The principal compliance options for power companies under the cap-and-trade include the application of direct CO₂ emission abatement and the procurement of emission allowances. The objective of this paper is to provide an analytical framework for assessing the cost-effectiveness of these options. We attempt to derive the marginal abatement cost for CO₂ using the output distance function and analyze the relative advantages of emission allowance procurement option as compared to direct abatement option. Real-option approach is adopted to incorporate emission allowance price uncertainty. Empirical result shows the marginal abatement cost with an average of €14.04/ton CO₂ for fossil-fueled power plants and confirms the existence of substantial cost heterogeneity among plants which is sufficient to achieve trading gains in allowance market. The comparison of two options enables us to identify the optimal position of the compliance for each plant. Sensitivity analyses are also presented with regard to several key parameters including the initial allowance prices and interest rate. The result of this paper may help Korean power plants to prepare for upcoming regulations targeted toward the reduction of domestic greenhouse gases.     

Price floors for emissions trading

Price floors in greenhouse gas emissions trading schemes can guarantee minimum abatement efforts if prices are lower than expected, and they can help manage cost uncertainty, possibly as complements to price ceilings. Provisions for price floors are found in several recent legislative proposals for emissions trading. Implementation however has potential pitfalls. Possible mechanisms are government commitments to buy back permits, a reserve price at auction, or an extra fee or tax on acquittal of emissions permits. Our analysis of these alternatives shows that the fee approach has budgetary advantages and is more compatible with international permit trading than the alternatives. It can also be used to implement more general hybrid approaches to emissions pricing.     

Role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets

The present paper theoretically and empirically examines the role of carbon swap trading and energy prices in volatilities and price correlations between the EU and Kyoto Protocol emissions trading schemes. A supply and demand based correlation model between EUA and sCER price returns is proposed in detail using inverse Box–Cox type marginal abatement cost (MAC) curves and simple emission reduction volume processes. The model includes financial players' EUA–sCER swap transaction in boom periods of carbon prices using the logit model for EUA and EUA–sCER swap volume correlations, and stronger energy price impacts on EUA prices than sCER prices using a mean-reverting lognormal process for energy prices. The empirical studies using EUA and sCER prices estimate the model parameters, resulting in a positive EUA volume impact on EUA–sCER swap transactions and a positive energy price impact on EUA prices. It is shown that high EUA–sCER price correlations during high EUA price periods stemmed from EUA–sCER swap transactions, whereas high EUA–sCER price correlations during the period of financial turmoil with low EUA prices came from the drop in energy prices. We also show that the leverage effects often observed in security markets exist in both the EUA and sCER markets according to the price–volatility relation.     

Economic restructuring in Eastern Europe and acid rain abatement strategies

Acid rain abatement in Europe are currently being discussed in view of the expiration of the Helsinki Protocol on SO₂ emission reduction. The changing energy situation in Eastern European countries is expected to have an influence on the deposition pattern in Europe. The paper presents a consistent energy scenario for Eastern European countries and compares optimal strategies to reduce SO₂ emissions. These strategies are based on runs with the RAINS model in which environmental targets have been set based on critical loads for sulphur. The analysis shows that economic restructuring and efficiency improvements in Eastern European countries, as well as in Western Europe, may result in significantly lower sulphur abatement. costs. Potential assistance to Eastern Europe to guarantee desired environmental standards in Western countries should therefore focus not only on providing emission control devices but also on the success of the economic transition process.     

Policy interactions,risk and price formation in carbon markets

Carbon pricing is an important mechanism for providing companies with incentives to invest in carbon abatement. Price formation in carbon markets involves a complex interplay between policy targets, dynamic technology costs, and market rules. Carbon pricing may under-deliver investment due to R&D externalities, requiring additional policies which themselves affect market prices. Also, abatement costs depend on the extent of technology deployment due to learning-by-doing. This paper introduces an analytical framework based on marginal abatement cost (MAC) curves with the aim of providing an intuitive understanding of the key dynamics and risk factors in carbon markets. The framework extends the usual static MAC representation of the market to incorporate policy interactions and some technology cost dynamics. The analysis indicates that supporting large-scale deployment of mature abatement technologies suppresses the marginal cost of abatement, sometimes to zero, whilst increasing total abatement costs. However, support for early stage R&D may reduce both total abatement cost and carbon price risk. An important aspect of the analysis is in elevating risk management considerations into energy policy formation, as the results of the stochastic modelling indicate wide distributions for the emergence of carbon prices and public costs around the policy expectations.     

Climate policies for road transport revisited (II): Closing the policy gap with cap-and-trade

Current policies in the road transport sector fail to deliver consistent and efficient incentives for greenhouse gas abatement (see companion article by Creutzig et al., in press). Market-based instruments such as cap-and-trade systems close this policy gap and complement traditional policies that are required where specific market failures arise. Even in presence of strong existing non-market policies, cap-and-trade delivers additional abatement and efficiency by incentivizing demand side abatement options. This paper analyzes generic design options and economic impacts of including the European road transport sector into the EU ETS. Suitable points of regulation are up- and midstream in the fuel chain to ensure effectiveness (cover all emissions and avoid double-counting), efficiency (incentivize all abatement options) and low transaction costs. Based on year 2020 marginal abatement cost curves from different models and current EU climate policy objectives we show that in contrast to conventional wisdom, road transport inclusion would not change the EU ETS allowance price. Hence, industrial carbon leakage induced by adding road transport to the EU ETS may be less important than previously estimated.     

Marginal CO2 abatement costs: Findings from alternative shadow price estimates for Shanghai industrial sectors

Shanghai, one of the most developed cities in China, is implementing a pilot regional carbon emission trading scheme. Estimating the marginal abatement costs of CO₂ emissions for the industrial sectors covered in Shanghai's emission trading scheme provides the government and participating firms useful information for devising compliance policies. This paper employs multiple distance function approaches to estimating the shadow prices of CO₂ emissions for Shanghai industrial sectors. Our empirical results show that the overall weighted average of shadow price estimates by different approaches ranges between 394.5 and 1906.1 Yuan/ton, which indicates that model choice truly has a significant effect on the shadow price estimation. We have also identified a negative relationship between the shadow price of CO₂ emissions and carbon intensity, and the heavy industries with higher carbon intensities tend to have lower shadow prices. It has been suggested that Shanghai municipal government take various measures to improve its carbon market, e.g. using the marginal abatement costs of participating sectors/firms as a criterion in the initial allocation of carbon emission allowances.     

Stylized agent-based modeling on linking emission trading systems and its implications for China's practice

China established a national emission trading system (ETS) to peak its carbon emission around 2030, building on the experience of pilot ETSs that are planned to be linked. Firms are the main entities that conduct carbon reduction and allowance trading. Due to the heterogeneity in the initial stock of technologies, firms' abatement costs differ, resulting in different abatement activities and the dynamics of the carbon price. Most of the studies on linking ETSs pay little attention to firms' behaviors, especially the interactions among firms' technology adoption strategies and their allowance trading strategies. In addition, whether linking ETSs can reduce carbon emission with lower system costs remains insufficiently explored. This study develops a stylized agent-based model (ABM) to explore the impact of linking two ETSs considering firms' heterogeneities and the interactions between their technology adoption strategies and allowance trading strategies. The model considers two ETSs, each of which includes energy-service-providing agents who are heterogeneous in the production scale and initial stock of technologies (and thus with different abatement costs), and attempts to minimize the total cost for a given output by adopting different technologies and trading emission allowances. The carbon price is dynamically affected by agents' willingness to pay, and a Walrasian auction is introduced to obtain the equilibrium. The results show that linking ETSs could be cost-effective to achieve carbon reduction commitment and creates a larger and more liquid carbon market; however, it also provides agents the opportunity to purchase more allowances rather than adopt low-emission technologies, which may result in more carbon emission. Adding restrictions on the linkage could somehow mediate this negative effect. Imposing strict exchange rate restrictions to the system with more balanced market shares of agents or quantitative restrictions would result in desirable results at the expense of increasing system costs. Moreover, restricted linkages could help alleviate the difficulties in initialing a linkage. The stylized ABM is mainly used for exploratory modeling purposes as a heuristic research device to examine in depth the effectiveness of unrestricted linkages and restricted linkages on adopting low-emission technologies at firms' level and the resulting carbon reduction. On the basis of the main findings of the ABM, we discuss the case if the Hubei pilot ETS links with the Guangdong pilot ETS, which could improve the understanding of the potential impact of linking ETSs on technology adoption and carbon reduction and provide policy implications for linking different ETSs.     

Complying with the Kyoto Protocol under uncertainty: Taxes or tradable permits?

The Kyoto Protocol allocates tradable emission allowances (AAUs) to developed countries, but they are free to choose a set of policy instruments to comply with these targets. We compare two different policy instruments: a tax and purely domestic tradable permits, for the European Union, the US and Japan. Information on abatement costs and international permit price is imperfect and stems from nine global economic models. For a country party to the Protocol, the benefit of emission reduction is that it can sell more or has to buy less AAUs. We show that in this context, permits entail a slightly lower expected cost than a tax for the US and Japan, whereas both instruments yield an almost equal outcome for Europe. Applying Weitzman’s framework (Prices vs. quantities, RES, 1974) in this context, we show the importance of the positive correlation between costs and benefits: technology shocks that lead to low abatement costs in one country generally lead to low abatement costs in other countries too, thereby leading to a low international permit price in the true-up period.     

Optimization of process parameters for preparation of powdered activated coke to achieve maximum SO2 adsorption using response surface methodology

Powdered activated coke (PAC) is a good adsorbent of SO₂, but its adsorption capacity is affected by many factors in the preparation process. To prepare the PAC with a high SO₂ adsorption capacity using JJ-coal under flue gas atmosphere, six parameters (oxygen-coal equivalent ratio, reaction temperature, reaction time, O₂ concentration, CO₂ concentration, and H₂O concentration) were screened and optimized using the response surface methodology (RSM). The results of factor screening experiment show that reaction temperature, O₂ concentration, and H₂O (g) concentration are the significant factors. Then, a quadratic polynomial regression model between the significant factors and SO₂ adsorption capacity was established using the central composite design (CCD). The model optimization results indicate that when reaction temperature is 904.74°C, O₂ concentration is 4.67%, H₂O concentration is 27.98%, the PAC (PAC-OP) prepared had a higher SO₂ adsorption capacity of 68.15 mg/g while its SO₂ adsorption capacity from a validation experiment is 68.82 mg/g, and the error with the optimal value is 0.98%. Compared to two typical commercial activated cokes (ACs), PAC-OP has relatively more developed pore structures, and its S_BET and V_tot are 349 m²/g and 0.1475 cm³/g, significantly higher than the 186 m²/g and 0.1041 cm³/g of AC1, and the 132 m²/g and 0.0768 cm³/g of AC2. Besides, it also has abundant oxygen-containing functional groups, its surface O content being 12.09%, higher than the 10.42% of AC1 and 10.49% of AC2. Inevitably, the SO₂ adsorption capacity of PAC-OP is also significantly higher than that of both AC1 and AC2, which is 68.82 mg/g versus 32.53 mg/g and 24.79 mg/g, respectively.     

Industrial DSM in a deregulated European electricity market—a case study of 11 plants in Sweden

In 2004 Sweden will become part of a common European electricity market. This implies that the price of electricity in Swedish will adapt to a higher European electricity price due to the increase in cross-border trading. Swedish plant is characterized as more electricity-intensive than plant on the European continent, and this, in combination with a higher European electricity price will lead to a precarious scenario.This paper studies the energy use of 11 plants in the municipality of Oskarshamn in Sweden. The aim is to show how these plants can reduce their electricity use to adapt to a European level. We have found that the plants could reduce their use of electricity by 48% and their use of energy by 40%. In a European perspective, where coal-condensing power is assumed to be the marginal production that alters as the electricity demand changes, the decrease in the use of electricity in this study leads to a reduction in global emissions of carbon dioxide of 69,000 tonne a year.Electricity generated in Sweden emits very low emissions of carbon dioxide and have thus consequently very low external cost. The freed capacity in Sweden could therefore replace electricity generated with higher external cost and as a result lower the total external cost in Europe. The emissions from the saved electricity could also be valuable within the EU emissions trading scheme, if the emissions calculation is done assuming the marginal electricity is fossil fuel based.     

Regional differences in China's CO2 abatement cost

Under a framework of output distance function with multiple outputs, the study discusses the carbon abatement cost at provincial and regional levels in China, using the shadow price analysis. The findings show that the abatement cost, reflecting the marginal opportunity cost of carbon reduction, varies greatly among the provinces. On average, the abatement cost of the eastern region was much higher than that of the mid-western region during the observed period. The findings provide evidence that the carbon prices in the current ETS pilots have been much lower than desired levels, implying inefficiency of the markets. The wide range of the abatement cost estimates supports that the equi-marginal principle does not hold for the regulations on carbon pollution at regional levels. The regional cost differences indicate the huge potential for China to minimize the total abatement cost with policy instruments that may motive the emissions moving from areas of low abatement cost to where the abatement cost is higher. For a few undeveloped provinces that are environmentally fragile and have high abatement cost, supplementary measures will be needed to reduce the negative impact of carbon cutbacks on the poor to the minimum.     

Robust MACCs? The topography of abatement by fuel switching in the European power sector

This paper employs a simulation model of the European power sector to analyze the abatement response to a CO₂ price through fuel switching, one of principal means of reducing greenhouse gas emissions in any economy. Abatement is shown to depend not only on the price of allowances, but also and more importantly on the load level of the system and the ratio between natural gas and coal prices. The interplay of these different determinants vitiates any simple relation between a CO₂ price and abatement and requires the development of more than two-dimensional graphics to illustrate these complex relationships. In the terms of the literature on the use of marginal abatement cost curves (MACCs), we find that these MACCs are not robust as usually defined and we suggest that the more complex topography developed in this paper may be more helpful in visualizing this abatement response to a CO₂ price.     

A model analysis of clean development mechanisms to reduce both CO2 and SO2 emissions between Japan and China

It is necessary for Japan to support the development of desulfurization policies of China to solve global and local environmental problems. This study proposes a “double clean development mechanism” to reduce both CO₂ and SO₂ emissions at the same time. The purpose of this study is to investigate the consequences for both countries' energy economies of following double clean development mechanism between Japan and China. A dynamic optimization model is developed to estimate the effects of Japanese investments in China for carbon dioxide recovery-disposal and emission desulfurization technologies. The simulation results suggest that a double clean development mechanism can effectively mitigate the damage caused by SO₂ emissions because the clean development mechanism itself can reduce SO₂ emissions, e.g. by switching to fuels. However, China might not be willing to accept restrictions on SO₂ emissions. This study also examines whether China will be able to maintain high growth rates with a clean development mechanism under the CO₂ and SO₂ restriction. The analysis shows that increasing the upper limit of investment from Japan to China can enhance the economies of the both nations. The effect of nuclear power installation on economic performance is also investigated for the both nations.     

Electricity pricing under “carbon emissions trading”: A dominant firm with competitive fringe model

The aim of this paper is to analyze the impact of trading of CO₂ emissions allowances on electricity pricing in the short run. We mainly refer to the European Emissions Trading Scheme (ETS) and are interested in understanding the role of electricity market structures. We carry out a simple analytical model useful to verify whether (and under which conditions) the impact of the ETS under market power could be lower (or higher) than that under perfect competition. We analyze a context where generators compete in a uniform, first price auction. Market power in the form of a dominant firm facing a competitive fringe model is assumed. The paper highlights that the marginal CO₂ opportunity costs are fully included in energy prices when the electricity market is perfectly competitive. Under market power the impact of the ETS equals or exceeds that under the competitive scenario only when there is excess capacity and the share of most polluting plants in the market is low enough. Otherwise, the impact under market power is less than under perfect competition and significantly decreases in the degree of market concentration. This especially occurs when there is not high excess capacity and regardless of either the plant mix or the allowance price. In this case, moreover, the marginal pass-through rate is lower in the peak than in the off-peak hours and can be even nil if the degree of market concentration is high enough.     

Electron-beam flue-gas treatment for multicomponent air-pollution control

During coal combustion, different pollutants such as fly ash, sulfur oxides (SO₂ and SO₃), nitrogen oxides (NO_x=NO+NO₂) and volatile organic compounds (VOCs) are emitted. These pollutants are harmful to the environment and human health. Therefore different air-pollution-control technologies are used. Usually these technologies are designed for removing only a single pollutant. An integrated system for SO₂, NO_x and VOC simultaneous emission control is presented in the paper. The technology uses a high-energy electron-beam from an accelerator and ammonia to treat simultaneously SO₂ and NO_x, the obtained by-product can be used as a fertilizer. The industrial-demonstration plant at EPS Pomorzany in Szczecin is under optimization tests now. Moreover, the tests carried out with the pilot plant at EPS Kawêczyn have demonstrated the possibility of volatile-organic-compounds destruction and their final toxicity reduction.     

二氧化碳与氢合成甲醇技术和产业化进展

  目的  二氧化碳和氢合成甲醇是实现二氧化碳大规模利用的重要途径之一,对CCUS产业链条的发展具有的重要支撑作用。  方法  文章主要对二氧化碳加氢制甲醇热力学特性、催化剂开发、产业化发展和技术经济性情况进行了综述。  结果  Cu基催化剂、贵金属催化剂和In₂O₃催化剂是主要反应催化剂类型,具有较好的催化性能,但仍有待进一步提高以满足高二氧化碳转化率和高甲醇选择性。尽管二氧化碳加氢制甲醇技术进步很快,目前已处于中试试验示范阶段,但受限于氢气原料成本较高和当前甲醇价格较低当前还难以大规模推广。  结论  随着氢能产业发展带来氢气价格的下降以及未来全国碳交易市场的启动,二氧化碳加氢制取甲醇将迎来新的发展。     

BP's emissions trading system

Between 1998 and 2001, BP reduced its emissions of greenhouse gases by more than 10%. BP's success in cutting emissions is often equated with its use of an apparently market-based emissions trading program. However no independent study has ever examined the rules and operation of BP's system and the incentives acting on managers to reduce emissions. We use interviews with key managers and with traders in several critical business units to explore the bound of BP's success with emissions trading. No money actually changed hands when permits were traded, and the main effect of the program was to create awareness of money-saving emission controls rather than strong price incentives. We show that the trading system did not operate like a “textbook” cap and trade scheme. Rather, the BP system operated much like a “safety valve” trading system, where managers let the market function until the cost of doing so surpassed what the company was willing to tolerate.     

The hedge value of international emissions trading under uncertainty

This paper estimates the value of international emissions trading, focusing on a here-to-fore neglected component; its value as a hedge against uncertainty. Much analysis has been done of the Kyoto Protocol and other potential international greenhouse gas mitigation policies comparing the costs of achieving emission targets with and without trading. These studies often show large cost reductions for all Parties under trading compared to a no trading case. We investigate the welfare gains of including emissions trading in the presence of uncertainty in economic growth rates, using both a partial equilibrium model based on marginal abatement cost curves and a computable general equilibrium model. We find that the hedge value of international trading is small relative to its value in reallocating emissions reductions when the burden sharing scheme does not resemble a least cost allocation. We also find that the effects of pre-existing tax distortions and terms of trade dominate the hedge value of trading. We conclude that the primary value of emissions trading in international agreements is as a burden sharing or wealth transfer mechanism and should be judged accordingly.     

A method for analyzing pollution control policies: Application to SO2 emissions in China

Market-based pollution control mechanisms such as pollution levy and cap and trade have received increasing attention from both academics and practitioners. A good understanding of the optimal pollution price under these mechanisms is a premise for regulators to make sound pollution control policies. In this paper, we propose a method for deriving the optimal pollution price for a given pollution target. This method consists of two steps that integrate cost function estimation and market equilibrium analysis: First, historical data is used to estimate the pollution abatement cost functions of the polluters; second, market models are used to solve the equilibrium pollution price under each control mechanism. For illustration, we apply the method to investigate SO₂ emission control policies in China, using a dataset of SO₂ emissions and abatement costs from three major industry sectors (Electricity, Gas, and Water Supply; Manufacturing; and Mining). Our analysis shows that the optimal levy rate is significantly higher than the actual rate adopted by the Chinese government. For example, the optimal levy rate should be 4.92 RMB/kg, while the actual rate is 1.26 RMB/kg in 2010. As a result, the actual emission structure is much less efficient: The overall cost savings would be 49.7% for all three sectors during 2006–2010 if the optimal emission structure is achieved. These findings have useful policy implications for the Chinese government. In addition, the method may be applied to analyze control policies at different aggregate levels (for example, provincial economies) or for other pollutants (for example, CO₂ and chemical oxygen demand).