Global trading versus linking: Architectures for international emissions trading

International emissions trading is widely seen as an indispensable policy pillar of climate change mitigation [Stern, N., 2007. The Economics of Climate Change. The Stern Review. Cambridge University Press, New York]. This article analyzes five different types of trading architectures, classified into two top–down (UNFCCC driven) and three bottom–up (driven by individual countries or regions) approaches. The two types of approaches are characterized by a trade-off between environmental effectiveness and political feasibility, respectively, whereas their relative cost-effectiveness depends on implementation details. Bottom–up architectures constitute imperfect substitutes for top–down architectures in terms of environmental effectiveness, and thus remain mere fallback options. However, especially the ‘formal linking’ architecture can act as complement in terms of cost-effectiveness.     

Next allocation phase of the EU emissions trading scheme: How tough will the future be?

The development of National Allocation Plans (NAPs) for the first phase 2005–2007 of the EU emissions trading scheme (EU-ETS) was accompanied by the stated concern of the industrial enterprises with installations that fall under the scope of the relevant Directive 2003/87, since the impacts of the allocation in their financial and technical modes of operation were judged to be severe. Thus, the intensity of the negotiations for the next allocation phase (i.e. 2008–2012), is expected to be heated. With a view to assisting enterprises, especially in the energy sector or for which energy use and its management is a crucial part of their activity, to incorporate in their business plans the impacts of the Directive in an informed manner, an attempt is made here to explore the constraints and the available options that will guide the coming EU-ETS potential allocations. In the analysis, the credits derived from the use of CDM are specifically taken into account. The results show that the next allocations would tend to be significantly more stringent than the current ones because of the combined effect of no inter-period transfer of allowances, the amount of CDM credits expected to be available compared to the amount of effort that would be required and the yield of emission reductions from existing or planned policies and measures. It becomes then crucial, if not imperative, for the enterprises involved as well as national governments to examine carefully means to address their obligations under the Directive.     

Banning banking in EU emissions trading?

Admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter-temporal flexibility: cost savings can be traded over time. However, unless individual EU Member States (MS) decide differently, the transfer of unused allowances from the period of 2005–2007 into the first commitment period under the Kyoto Protocol, i.e. 2008–2012, will be prohibited. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This analysis is based on a simulation which was recently carried out in Germany with companies and with a student control group. The findings suggest that a EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter-temporal flexibility. Second, we use simple game-theoretic considerations to argue that, under reasonable assumptions, such a EU-wide ban on banking will be the equilibrium outcome. Thus, to avoid a possible prisoners’ dilemma, MS should have co-ordinated their banking decisions.     

Option value of gasification technology within an emissions trading scheme

Investment analysis is mostly implemented with Discounted Cash Flow (DCF) methods, such as the Net Present Value (NPV). The problem in a typical application of these methods is the limited ability to value real options, management's ability to adapt to changing market conditions or to revise decisions. This paper presents a simulation model, in which the investment is regarded as a single-firm problem in an operating environment with multiple exogenous and stochastic prices. The simulation model is used to explore the impact of emissions trading, and in particular the European Union Emissions Trading Scheme (EU ETS), on investments in Integrated Gasification Combined Cycle (IGCC) plants. Two real case studies are presented: modifications of an existing condensing power plant and a new combined heat and power plant. The benefit of the selected approach is that it can take into account the value of multiple simultaneous real options better than a standard DCF analysis. The results show that a straightforward application of DCF analysis can lead to biased results in competitive energy markets within an emissions trading scheme, where a number of uncertainties potentially combined with several real options can make quantitative investment appraisals very complex.     

The coal question that emissions trading has not answered

Can emissions trading assist with the task of placing a limit on coal production and consumption in Australia? This paper outlines a critical political economy perspective on coal and a flagship ‘market mechanism’ for emissions reduction. The prospects for an effective emissions trading scheme in coal-dominated economies are considered in light of its theoretical justifications as well as recent attempts to price carbon in Australia. Emissions trading is a weak instrument that does not address real-world failures of coal governance. At their theoretical best, carbon prices produce marginal changes to the cost structure of production. In practice, the Australian case demonstrates emissions trading is an attempt to displace the emissions reduction task away from coal, through compensation arrangements and offsetting. In light of the urgent need to rapidly reduce global emissions, direct regulation and democratisation of coal production and consumption should be flagship climate policy.     

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.     

Environmental regulations and emissions trading in China

This paper begins with the international context concerning climate change and how China fits into this context. Concentration is then turning into the emissions control system in China including environmental planning, legislation, policy instruments and measures as well as institutional setting in China’s environmental governance system. Special attentions also being paid to emissions control in China’s power sector. It should be noted that the pollution discharge permit system in China only exists superficially in many places. Insufficient resources are applied to the implementation of the said permit system, which in turn means that the system is applied according to differing standards in different parts of the country. The findings of this paper suggested that emissions trading programmes are usually introduced alongside the existing policies. The power sector usually has numerous other policy objectives and therefore the design and implementation of emissions trading programmes in the sector will have to address concern about the compatibility of existing industry policies.     

Simulation analysis of emissions trading impact on a non-utility power plant

Non-utility power plants can competitively participate in open electricity market to reduce operational costs but in the absence of pollution charges or emissions trading such generators are tempted to cause greater pollution for profit maximization. This paper presents a solution that incorporates pollution charges for nitrogen oxides and sulphur dioxide emissions in line with existing national environmental quality standards and a new carbon dioxide emissions trading mechanism. A novel approach has been used for allocation of allowable emissions that favors efficiently fuelled and environmentally friendly operation for maximizing profit. Impact of proposed carbon trading on economical utilization of enormous indigenous coal reserves has been analyzed and determined to be acceptable. Software developed in this paper, harnessing Sequential Quadratic Programming capabilities of Matlab, is shown to be adequate simulation tool for various emissions trading schemes and an useful operational decision making tool for constrained non-linear optimization problem of a non-utility power plant.     

Environmental benefits of distributed generation with and without emissions trading

The need for improving energy efficiency and reducing CO₂ emissions and other pollutants, as well as the restructuring of energy markets has favoured the increase of distributed energy resources (DER). The co-ordinated control of these sources comprising renewable energy sources (RES) and distributed generators (DG) characterised by higher efficiencies and lower emissions compared to central thermal generation, when based on coal or oil provide several environmental benefits. These benefits can be quantified based on DER participation in the CO₂ emission trading market. This paper provides a method to calculate emissions savings achieved by the marginal operation of DER in liberalised market conditions using available emissions data. The participation of DER in emissions trading markets is also studied, with respect to profits, pollutants decrease and change in operating schedules. It is shown that the operation of DER can significantly reduce pollutants, provided sufficient remuneration from CO₂ emission trading market participation is provided. Moreover, it is shown that using average emissions values to calculate the environmental benefits of DER might provide misleading results.     

The fundamentals of the future international emissions trading system

The study aims to analyze the sectoral marginal abatements cost curves for a number of EU countries as well as to examine the efficiency aspects and the economic impacts for the major sectors of the ETS under different carbon market configurations in 2010 and 2020. To produce a consistent and realistic assessment, we employ sources such as GHG National Inventories, NAPs and POLES world energy model to constitute the sectoral base year and 2010, 2020 emission levels in different countries and regions. We then use the market analysis tool ASPEN, which enables to derive supply and demand from sectoral MACCs produced with the POLES model, and to evaluate the economic impacts on the carbon market participants. The paper shows that, in compliance with the Kyoto targets, the benefits of an enlarged carbon market are significant, since more than 50% of the abatement in the short term have to be achieved in ETS sectors, which may indeed use CDM or JI credits. A second major conclusion is that in 2020 the new flexibility margins provided by the adjustment of investments in new capacities compensate for the increase in pressure towards stronger emission reductions. This reduces the relative importance of the enlarged carbon market.     

Does EU ETS lead to emission reductions through trade? The case of the Swedish emissions trading sector participants

The first trading period of the European Emissions Trading Scheme (EU ETS) has recently come to an end. The experiences of the actors in the trading sector will be of great importance in evaluating the aim and direction of this “Grand Policy Experiment”. This paper gives an account of the attitudes and actions of the companies included in the Swedish emissions trading sector after about 15 months of experience with the system. The data are based on a study commissioned by the Swedish Environmental Protection Agency, and is a comprehensive survey that encompasses all companies operating installations included in the Swedish Emission Trading Registry. However, the results point in a somewhat disquieting direction. Although the Swedish companies have shown significant interest in reducing emissions, this survey indicates that this is done without close attention to the pricing mechanism of the market-based instruments. If this praxis is widespread within the European trading sector, it can have a serious negative effect on the efficiency of the system.     

Internalizing carbon costs in electricity markets: Using certificates in a load-based emissions trading scheme

Several western states have considered developing a regulatory approach to reduce greenhouse gas (GHG) emissions from the electric power industry, referred to as a load-based (LB) cap-and-trade scheme. A LB approach differs from the traditional source-based (SB) cap-and-trade approach in that the emission reduction obligation is placed upon Load Serving Entities (LSEs), rather than electric generators. The LB approach can potentially reduce the problem of emissions leakage, relative to a SB system. For any of these proposed LB schemes to be effective, they must be compatible with modern, and increasingly competitive, wholesale electricity markets. LSE's are unlikely to know the emissions associated with their power purchases. Therefore, a key challenge for a LB scheme is how to assign emissions to each LSE. This paper discusses the problems with one model for assigning emissions under a LB scheme and proposes an alternative, using unbundled Generation Emission Attribute Certificates. By providing a mechanism to internalize an emissions price signal at the generator dispatch level, the tradable certificate model addresses both these problems and provides incentives identical to a SB scheme.     

An integrated optimization modeling approach for planning emission trading and clean-energy development under uncertainty

The growing concern for global warming caused by the increased atmospheric concentration of carbon dioxide (CO₂) has a significant effect on environmental and energy policies and economic activities, due to the ever-increasing use of fossil fuels such as coal, oil and natural gas throughout the world. A variety of complexities and uncertainties exist in CO₂-emission-related processes and various impact factors, such as CO₂-emission inventory, mitigation measure, and cost parameter. Decision makers face problems of how many clean-energy resources (or carbon credits) are needed to be replaced (or bought) by measuring electric-power benefits and uncertain economic penalties from random excess CO₂ exceeding to given discharge permits. In this study, an integrated optimization modeling approach is developed for planning CO₂ abatement through emission trading scheme (ETS) and clean development mechanism (CDM), where uncertainties presented in terms of fuzzy sets, interval values, and random variables can be addressed. The developed model is also applied to a case study of planning CO₂-emission mitigation for an electric-power system (EPS) that involves three fossil-fueled power plants (i.e., gas, oil and coal-power plants). Different trading schemes and clean-energy development plans corresponding to different CO₂-emission management policies have been analyzed. The results demonstrate that CO₂-emission reduction program can be performed cost-effective through emission trading and clean-energy development projects. Violation analyses are also conducted to demonstrate that different violation levels for model’s objective and constraints have different effects on system benefit and satisfaction degree as well as emission trading and clean-energy development.     

Carbon emissions trading scheme exploration in China: A multi-agent-based model

To develop a low-carbon economy, China launched seven pilot programs for carbon emissions trading (CET) in 2011 and plans to establish a nationwide CET mechanism in 2015. This paper formulated a multi-agent-based model to investigate the impacts of different CET designs in order to find the most appropriate one for China. The proposed bottom-up model includes all main economic agents in a general equilibrium framework. The simulation results indicate that (1) CET would effectively reduce carbon emissions, with a certain negative impact on the economy, (2) as for allowance allocation, the grandfathering rule is relatively moderate, while the benchmarking rule is more aggressive, (3) as for the carbon price, when the price level in the secondary CET market is regulated to be around RMB 40 per metric ton, a satisfactory emission mitigation effect can be obtained, (4) the penalty rate is suggested to be carefully designed to balance the economy development and mitigation effect, and (5) subsidy policy for energy technology improvement can effectively reduce carbon emissions without an additional negative impact on the economy. The results also indicate that the proposed novel model is a promising tool for CET policy making and analyses.     

An interval-fuzzy two-stage stochastic programming model for planning carbon dioxide trading under uncertainty

In this study, an IFTSP (interval-fuzzy two-stage stochastic programming) method is developed for planning carbon dioxide (CO₂) emission trading under uncertainty. The developed IFTSP incorporates techniques of interval fuzzy linear programming and two-stage stochastic programming within a general optimization framework, which can effectively tackle uncertainties described in terms of probability density functions, fuzzy membership functions and discrete intervals. The IFTSP cannot only tackle uncertainties expressed as probabilistic distributions and discrete intervals, but also provide an effective linkage between the pre-regulated CO₂ mitigation policies and the associated economic implications. The developed model is applied to a case study of CO₂-emission trading planning of industry systems under uncertainty, where three trading schemes are considered based on different trading participants. The results indicate that reasonable solutions have been generated. They are help for supporting: (a) formulation of desired GHG (greenhouse gas) mitigation policies under various economic and system-reliability constraints, (b) selection of the desired CO₂-emission trading pattern, and (c) in-depth analysis of tradeoffs among system benefit, satisfaction degree, and CO₂ mitigation under multiple uncertainties.     

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.     

On backstops and boomerangs: Environmental R&D under technological uncertainty

In areas such as climate change, the recent economic literature has been emphasizing and addressing the pervasive presence of uncertainty. This paper considers a new and salient form of uncertainty, namely uncertainty regarding the environmental characteristics of ‘green’ innovations. Here, R&D may generate both backstop technologies and technologies that turn out to involve a new pollution problem (‘boomerangs’). In the optimum, R&D will therefore typically be undertaken more than once. Extending results from multi-stage optimal control theory, we present a tractable model with a full characterization of the optimal pollution and R&D policies and the role of uncertainty. In this setting, (i) the optimal R&D program is defined by a research trigger condition in which the decision-maker's belief about the probability of finding a backstop enters in an intuitive way; (ii) a decreasing probability of finding a backstop leads to the toleration of higher pollution levels, slower R&D, a slower turnover of technologies, and an ambiguous effect on the expected number of innovations; (iii) learning about the probability of a backstop is driven by failures only and leads to decreasing research incentives; and (iv) small to moderate delays in the resolution of technological uncertainty do not affect the optimal policy.     

Carbon trading: Current schemes and future developments

This paper looks at the greenhouse gas (GHG) emissions trading schemes and examines the prospects of carbon trading. The first part of the paper gives an overview of several mandatory GHG trading schemes around the world. The second part focuses on the future trends in carbon trading. It argues that the emergence of new schemes, a gradual enlargement of the current ones, and willingness to link existing and planned schemes seem to point towards geographical, temporal and sectoral expansion of emissions trading. However, such expansion would need to overcome some considerable technical and non-technical obstacles. Linking of the current and emerging trading schemes requires not only considerable technical fixes and harmonisation of different trading systems, but also necessitates clear regulatory and policy signals, continuing political support and a more stable economic environment. Currently, the latter factors are missing. The global economic turmoil and its repercussions for the carbon market, a lack of the international deal on climate change defining the Post-Kyoto commitments, and unfavourable policy shifts in some countries, cast serious doubts on the expansion of emissions trading and indicate that carbon trading enters an uncertain period.     

Analysis of variability and correlation in long-term economic growth rates

Quantifying the uncertainty in future climate change is an important input into policy decisions. Two important sources of uncertainty are economic growth and technological change, which in turn contribute to uncertainty in future emissions. In this paper, we focus on uncertainty in one type of technical change: productivity growth. Estimates of uncertainty in future growth must necessarily include expert judgment, since the future will not necessarily look like the past. But previous uncertainty studies have taken expert judgments based on annual national growth rates, and applied them to models with regional aggregations and multi-year time steps, and often have made crude assumptions about the correlation between regions. This paper analyzes data on the variability and covariability of historical economic productivity growth rates, and investigates the effect of spatial and temporal aggregation on variance. The results are intended to inform participants in expert elicitation exercises on future economic growth uncertainty.     

Border adjustment for European emissions trading: Competitiveness and carbon leakage

Unilateral or sub-global policies to combat climate change are potentially sensitive to free-riding and carbon leakage. One way of dealing with carbon leakage and competitiveness is the imposition of border adjustment measures for competing imports, for example in the form of the obligation to importers of goods to purchase and surrender emissions allowances to the authorities when importing. In this paper, we explore some implications of border adjustment measures in the EU ETS, for sectors that might be subject to carbon leakage. We examine the implications of two variants of these measures on the competitiveness of these sectors and on the global environment with the help of a multi-sector, multi-region computable general equilibrium (CGE) model of the global economy. Our calculations suggest that border adjustment might reduce the sectoral rate of leakage of the iron and steel industry rather forcefully, but that the reduction would be less for the mineral products sector, including cement. The reduction of the overall or macro rate of leakage would be modest. So, from an environmental point of view border tax adjustments would not be a very effective policy measure, but might mainly be justified by considerations of sectoral competitiveness.