Designing carbon markets,Part II: Carbon markets in space

This paper analyses the design of carbon markets in space (i.e., geographically). It is part of a twin set of papers that, starting from first principles, ask what an optimal global carbon market would look like by around 2030. Our focus is on firm-level cap-and-trade systems, although much of what we say would also apply to government-level trading and carbon offset schemes. We examine the “first principles” of spatial design to maximise flexibility and to minimise costs, including key design issues in linking national and regional carbon markets together to create a global carbon market.     

Transport sector-strategies markets, technology and innovation

Transport is often characterised as the fastest growing and most unmanageable source of GHG emissions. Aviation and road freight traffic pose a particular challenge for mitigation because of their rapid growth and apparent economic importance.Discussion of mitigation policy has centred on different ideas of what is ‘optimal’, using engineering, least-cost arguments or economic efficiency arguments. These arguments can justify policies that might reduce transport energy use and GHG emissions in OECD countries by somewhere between 10% and 40% relative to business-as-usual levels in 2020. Deeper emission reductions are technically possible but would depend on changes in behaviour and, it appears, in preferences.Existing economic and engineering analysis aiming to identify or design ‘optimal’ policies is based on unfounded assumptions about values and behaviour. Governments aiming to influence values and behaviour are more likely to succeed through an experimental approach than through trying to choose the ‘best’ measures. The most fruitful way forward might be to design strategies that foster innovation in behaviour and institutions. in much the same way that many governments aim to foster innovation in technology.     

Market influence on the low carbon energy refurbishment of existing multi-residential buildings

This paper explores the relationship between the energy market; the political and regulatory context; and energy design decisions for existing multi-residential buildings, to determine what form the energy market landscape would take if tailored to encourage low carbon solutions. The links between market dynamics, Government strategies, and building designs are mapped to understand the steps that achieve carbon reduction from building operation. This is achieved using a model that takes financial and energy components with market and design variables to provide net present cost and annual carbon outputs. The financial component applies discounted cash flow analysis over the building lifespan, with discount rates reflecting contractual characteristics; the carbon component uses Standard Assessment Procedure (SAP) 2005. A scenario approach is adopted to test alternative strategies selected to encourage low carbon solutions in two residential and two office designs.     

Carbon pricing and electricity markets — The case of the Australian Clean Energy Bill

We examine the impact of the Clean Energy Bill on the price behavior of electricity futures contracts in the Australian National Electricity Market. First, we compute ex-ante forward risk premiums in the pre-tax period (until June 2012), then derive market-implied expectations about additional costs of the Carbon Pricing Mechanism (CPM) on generators as well as pass-through rates during the carbon tax (July 2012–June 2014) and post-tax (after July 2014) periods. Our results suggest that the observed carbon premiums became increasingly higher, once the carbon tax had been proposed and subsequently legislated in 2011. During periods where market participants could be relatively certain that the tax would be effective, we find expected carbon pass-through rates between 67% and 150%, which seem to be inversely related to emission intensities in the regional markets. Our results are also a clear indication of strong policy uncertainty with regards to the CPM and suggest that in the future a stable and long-term policy framework would be required for a carbon pricing mechanism to have its full effect.     

Can China afford to commit itself an emissions cap? An economic and political analysis

As the world’s second largest carbon emitter, China has long been criticised as a ‘free-rider’ enjoying benefits from other countries’ efforts to abate greenhouse gas emissions but not taking due responsibilities of its own. China has been singled out as one of the major targets at the subsequent negotiations after the Kyoto curtain had fallen. By analysing the historical contributions of inter-fuel switching, energy conservation, economic growth and population expansion to China’s CO₂ emissions during the period 1980–1997, this article first demonstrates that the above criticism cannot hold its ground. Next, we analyse what the economic effects would be if China’s carbon emissions in 2010 were cut by 20 and 30%, respectively, relative to the baseline. We found that China’s GNP losses under the two less restrictive carbon limits are in the same range as the often reported estimates for industrialised countries under very restrictive carbon limits. Then the article envisions some efforts and commitments that could be expected from China until its per capita income catches up with the level of middle-developed countries. By emphasising the win–win strategies, these efforts and commitments could be unlikely to severely jeopardise China’s economic development and, at the same time, would give the country more leverage at the post-Kyoto climate change negotiations. Finally, the article is concluded with the argument that combating global climate change is in China’s interest. It will be beneficial to a more sustainable development of the Chinese economy as well as to the global climate.     

Performance of wholesale electricity markets with high wind penetration

This paper examines the impact of progressively deeper levels of wind generation and/or abatement on the performance of a wholesale market and its incumbent thermal generators with non-convex unit commitment constraints. Comparison is made to the result that marginal cost pricing should induce investors to build the least-cost capacity mix, since it is not clear that this will hold in renewable-rich systems.It is first found that unit commitment and forecast uncertainty do not cause significant departure from this result when the generator fleet is optimal. ‘Optimality' in this sense is determined in a capacity expansion problem that does not feature unit commitment, and which allows thermal generators to be built or retired as greater renewable generation or abatement is mandated. In contrast, the wholesale market with no retirement of thermal generation experiences progressively greater disparity between total system prices and costs, and lower returns to generators, simply due to over-capacity rather than any form of variability-related market failure. A carbon price is observed to be far superior to a renewable portfolio standard when the existing set of thermal generators do not retire, but this difference is less stark when the generation mix is optimal. The implications of these results for market design and system planning are then discussed.     

Brazilian energy policies side-effects on CO2 emissions reduction

This study focuses on some of the programs and measures Brazil has undertaken over the past two or three decades in order to mitigate economic or environmental problems, which have also had positive effects on the reduction of the country's carbon dioxide emissions. Results show that, in the year 2000 alone, some 11% in CO₂ emissions from energy use in Brazil have been reduced compared to what would have been emitted that year had the actions reviewed here not been implemented in good time. As these actions have not been motivated as a strategy to curb global climate change, if their benefits related to avoided carbon emissions are not fully appraised in the near future, chances are that these policies may be discontinued. For instance, in the case of the business-as-usual scenario drawn up by the Ministry of Mines and Energy in 2001, the discontinuity of the policies analyzed here would result in CO₂ emissions 20% higher by 2020, compared to what would happen were these policies kept over the long term. Therefore, the perspective presented here spotlights some of the hidden benefits of the programs and measures underway in the country, justifying their continuation or even intensification.     

The evolving design of RTO ancillary service markets

Although the markets for ancillary services at the North American Independent System Operators are often structured in quite different ways there is an emerging set of core design elements that represent a rough consensus as to what the optimal design configuration for ancillary services should be, albeit with some regional variation. This paper looks back at how the design of ancillary services markets has recently evolved to put this development in context. Thereafter it examines the methods by which ancillary services are procured by highlighting the procurement practices at a number of different Independent System Operators, principally those in California, New York, New England, Texas and the PJM Interconnection, in an attempt to tease out the remaining reasons why the ancillary service markets are still so different. This is important as there are many innovations that are not rooted in regional differences but reflect genuine technical advances and economic efficiency gains and can be replicated across other ISOs to produce more efficient designs, greater reliability and lower costs.     

二次风改造和调整对燃用福建无烟煤循环流化床锅炉运行经济性的影响

先后对燃用福建无烟煤的DG75/3.82 11型循环流化床锅炉二次风机进行变频调速改造、量体定做高效节能型风机,并减小了二次风喷嘴截面面积,增强了二次风的穿透能力,改善了二次风的均匀混合效果,2台锅炉年平均飞灰含碳量下降了3.26个百分点。同时,二次风调整测试发现,在一次风量保持基本不变的条件下,随着二次风率的增加,飞灰含碳量开始明显减少;当二次风率在0.42左右时飞灰含碳量最低,然后飞灰含碳量随着二次风率的增加而增加。在过量空气系数λ不变的情况下,飞灰含碳量随着上、下二次风增加而减少,减少幅度逐渐收窄;当上、下二次风比超过1.3后,飞灰含碳量有所增加。在二次风率不变的情况下,灰渣比随着上、下二次风增加而减少,减少幅度逐渐收窄。     

The economics of climate change and the change of climate in economics

Economics is an unavoidable decision-making tool in the field of climate policy. At the same time, traditional economics is being challenged both empirically and theoretically by scholars in different fields. Its non-neutrality in dealing with climate-related issues—which is illustrated by the controversy over the “no-regret potential”—would thus call for an opening of economics to insights from other disciplines. Within that context, we show that an evolutionary-inspired line of thought coupled with a systemic and historical perspective of technological change provides a very insightful alternative to traditional economics. More particularly, it follows from that framework that the picture of the climate challenge ahead looks very different from what traditional economic analyses would suggest. For instance, the lock-in process makes it unlikely that traditional cost-efficient measures (such as carbon taxation or tradable emission rights) will be sufficient to bring about the required radical changes in the field of energy as they fail to address structural barriers highlighted in our approach.     

The policy challenges of tradable credits: A critical review of eight markets

This article offers a critical review of eight tradable permit markets: water permits at Fox River, Wisconsin; the U.S. leaded gasoline phase-out; sulfur dioxide credits under the U.S. Clean Air Act Amendments of 1990; the Regional Clean Air Incentives Market (RECLAIM) for controlling ozone and acid rain in Southern California; renewable energy credit trading at the regional level in the United States; individual transferrable quotas for fisheries at the national level in New Zealand; carbon credits traded under the European Union-Emissions Trading Scheme; and carbon offsets permitted under the Clean Development Mechanism of the Kyoto Protocol. By “critical” the article does not fully weigh the costs and benefits of each tradable credit scheme and instead identifies key challenges and problems. By “review” the author relied exclusively on secondary data from an interdisciplinary review of the academic literature. Rather than performing as economic theory suggests, the article shows that in many cases credit markets are prone to compromises in program design, transaction costs, price volatility, leakage, and environmental degradation. The article concludes by discussing the implications of these problems for those seeking to design more equitable and effective public policies addressing environmental degradation and climate change.     

The political economy of international green certificate markets

This paper analyzes the political economy of establishing bilateral trade in green certificate markets as one step towards harmonization of European green electricity support systems. We outline some of the economic principles of an integrated bilateral green certificates market, and then discuss a number of issues that are deemed to be critical for the effectiveness, stability and legitimacy of such a market. By drawing on some of the lessons of the fairly recent intentions to integrate a future green certificate market in Norway with the existing Swedish one, we highlight, exemplify and discuss some critical policy implementation and design issues. These include, for instance, the system's connection to climate policy targets, the role of other support schemes and the definition of what green electricity technologies should be included. Furthermore, the establishment of an international market presumes that the benefits of renewable power (e.g., its impacts on the environment, diversification of the power mix, self-sufficiency, etc.) are approached and valued from an international perspective rather than from a national one, thus implying lesser emphasis on, for instance, employment and regional development impacts. A bilateral green certificate system thus faces a number of important policy challenges, but at the same time it could provide important institutional learning effects that can be useful for future attempts aiming at achieving greater policy integration in the European renewable energy sector.     

French hydrogen markets in 2008 - Overview and future prospects

This study analyses the current industrial hydrogen markets in France on both a European and international scale, while endeavouring to assess future prospects by 2030. Hydrogen is produced either on purpose or unintentionally as a co-product. Intentional production of hydrogen, generally from natural gas, is classified as captive or merchant hydrogen. France produces about 920,000 metric tons of hydrogen annually. The producer and consumer industries are, in decreasing order of importance are: oil for refinery and petrochemicals, ammonia, iron & steel (co-production), chemicals, and chlorine (co-production). The intentional production of hydrogen from natural gas amounts to less than that co-produced: 40% compared with 60%. The amount of burned hydrogen is about 25% of the total. Production-related carbon dioxide emissions range between 1% and 2% of the total emissions in France. There is an increasing trend in the industrial hydrogen production, essentially due to the oil industry whereas a decline in production is expected in the ammonia industry. The annual production around 2030 should therefore be greater than 1 million metric tons (MMT) per year. If the iron & steel industry were to use hydrogen in every possible situation, it would double the total quantity of hydrogen produced and consumed in France.     

A discriminating monopolist model of natural gas markets over the period 1960–1966

This paper presents estimates of what a monopoly would set natural gas prices at in the inter- and intra-state markets of the United States over the period 1960–1966. The predictions are accurate but not perfect. This paper cannot conclusively prove that price setting in these markets was done in this manner, however, due to lack of assumptions on the supply side. The estimates are close enough to be interesting though, and a model of the supply side should be developed.     

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.     

The relationship between regional natural gas markets and crude oil markets from a multi-scale nonlinear Granger causality perspective

This study first decomposes the daily returns of regional gas and crude oil at different time scales, using the ensemble empirical mode decomposition (EEMD) method. It then investigates the causality relationship between each pair of components at the different time scales, by employing the linear and nonlinear Granger causality tests. For the original returns series, this study finds that unidirectional linear Granger causality exists from crude oil markets to North American and European gas markets. However, for nonlinear characteristics, the crude oil and regional gas markets exhibit bidirectional nonlinear Granger causality. On the medium-term time scale, a bidirectional nonlinear spillover effect is found between the markets. The long-term trends for the markets suggest a significant linear relationship; however, no nonlinear spillover effect is found between the crude oil and regional gas markets.     

Defining geographic coal markets using price data and shipments data

Given the importance of coal in world energy supply an analysis of the relevant geographic market is essential for consumers, producers, as well as for competition policy. The purpose of this paper is to define the relevant economic market for steam and coking coal, and to test the hypothesis of single world markets for these coal products. Methodologically the paper relies on two different tests for defining markets, using both shipments data and price data. The results from both methods point in the same direction. In the case of coking coal the results indicate that the market is essentially global in scope, and also that the market has become more integrated over time. The results for steam coal show that the market is more regional in scope, and there exist no clear tendencies of increased integration over time. One policy implication of the finding that the steam coal market is more regional in scope, and thus that the market boundary is smaller than if the market would have been international, is that a merger and acquisition in this market likely would have been of a more concern for antitrust authorities than the same activity on the coking coal market.     

Neutronics feasibility of an MIT Reactor–driven subcritical facility for the Fluoride‐salt–cooled High‐temperature Reactor

The current study explores an innovative option for demonstrating the Fluoride‐salt–cooled High‐ temperature Reactor ( FHR) technologies with a reactor‐driven subcritical facility. The FHR uses clean salt coolants, carbon‐matrix coated‐particle fuel similar to that used in High‐temperature Gas‐cooled Reactors and can be coupled to a nuclear air‐Brayton combined cycle. Recent assessments indicate favorable economics and safety characteristics, but no FHR has been built. The question is what experimental facilities should be constructed to reduce technical uncertainties before a decision to build a test or demonstration reactor? The MIT Reactor design and license would allow the construction and operation of a subcritical facility with 700°C salt circulating through multiple full‐width partial‐height fuel assemblies operating with a power density up to 60% of a commercial FHR. This option would allow hot systems testing as a major step toward building the test or demonstration reactor. Preliminary system design, power control options, testing capabilities, and key nuclear characteristics of such a reactor‐driven subcritical facility are described. A method of deriving subcritical multiplicity using surface source has been proposed and verified in this study. Finally, the neutronic impacts on the driver facility, ie, the MIT Reactor, have been evaluated.     

Integration of electricity markets in Europe: Relevant issues for Italy

In this paper, we analyze the current trend towards a higher degree of market integration in Europe and identify those aspects that are particularly relevant for Italy. The Italian involvement in this process appears comparatively modest. A welfare analysis, which focuses specifically on the integration of the Italian market, will certainly be a useful support to any policy decision. We argue that, given the peculiarities of the Italian market design, a volume coupling solution could avoid, at the moment, the costs of what could be a significant harmonization effort and, in the end, it might constitute the best short-term strategy. This proposal should be adequately considered, taking into account the complexity of designing an efficient volume-only coordination procedure.     

Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets

We answer two policy questions: (1) what are the estimated merit-order effects of renewable energy in the California Independent System Operator’s (CAISO’s) day-ahead market (DAM) and real-time market (RTM)? and (2) what causes the hourly DAM and RTM prices to systematically diverge? The first question is timely and relevant because if the merit-order effect estimates are small, California’s renewable energy development is of limited help in cutting electricity consumers’ bills but also has a lesser adverse impact on the state’s investment incentive for natural-gas-fired generation. The second question is related to the efficient market hypothesis under which the hourly RTM and DAM prices tend to converge. Using a sample of about 21,000 hourly observations of CAISO market prices and their fundamental drivers during 12/12/2012–04/30/2015, we document statistically significant estimates (p-value≤0.01) for the DAM and RTM merit-order effects. This finding lends support to California’s adopted procurement process to provide sufficient investment incentives for natural-gas-fired generation. We document that the RTM-DAM price divergence partly depends on the CASIO’s day-ahead forecast errors for system loads and renewable energy. This finding suggests that improving the performance of the CAISO’s day-ahead forecasts can enhance trading efficiency in California’s DAM and RTM electricity markets.