Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals

We investigate the price determination of the European Union emission allowance (EUA) of the European Union emissions trading scheme (EU ETS). We postulate an uncertain permit price and risk-averse firms which have the possibility to hedge in the forward market. The firms produce final goods, abate their emissions and trade permits in the permit market. The dependence of the equilibrium permit price on exogenous variables is studied in a permit market model. We test our theoretical findings with empirical data from 2005 to 2010 in the EU ETS market. We use daily forward prices of EUA as our dependent variable. We use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals, such as German electricity prices and gas and coal prices, with the price of EUA. We find that the EUA forward price depends on fundamentals, especially on the price of electricity as well as on the gas–coal difference, in a statistically significant way.     

Asymmetric relationship between carbon emission trading market and stock market: Evidences from China

This paper has investigated the asymmetric relationship between carbon emission trading market and stock market in China by using the nonlinear auto-regressive distributed lag (NARDL) model. Based on our investigation on both of the overall and sector level of stock market, we have obtained interesting and convincing empirical results that show there are significantly negative long-run and short-run asymmetric relationships between carbon emission trading market and overall stock market in China. Specifically, we have noticed that while passing the effects from the former to the later, the increasing of carbon emission trading price would make greater effects on the stock price than its decreasing. Also, on the sector level, carbon emission trading price is significantly related to some energy intense sectors and financial sector stock market. Furthermore, we have surprisingly found out that there are no significant effects passing from stock index to carbon emission trading price in China, neither on the overall level nor on the sector level of stock market.     

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.     

The impact of China's carbon allowance allocation rules on the product prices and emission reduction behaviors of ETS-covered enterprises

It is an important task for China to allocate carbon emission allowance to realize its carbon reduction target and establish carbon trading market. China has designed several allocation rules within seven pilot regions. What influence those rules may cause is closely related with the enthusiasm of emission trading scheme (ETS) covered enterprises' participation in carbon market, and more importantly, with the mechanism design and sustainable development of carbon market. For this purpose, the multi-stage profit model is developed to analyze the ETS-covered enterprises' product prices and emission reduction behaviors under different allocation rules. The results show that, first, under the rules of grandfathering, self-declaration and auctioning, when deciding the optimal product price and optimal carbon emission reduction, those enterprises may focus on maximizing current stage profit; however, under the rule of benchmarking, those enterprises may care more about the impact of current decisions on the profit in next stage. Second, the optimal product price policy is positively correlated with the price of the same kind products, consumers' low-carbon awareness and government subsidy. Finally, along with the increase of carbon price, consumers' low-carbon awareness and government subsidy and the decrease of carbon emission cap, those enterprises tend to reduce carbon emissions.     

The US market for SO2 permits: Policy implications of the low price and trading volume

The price of SO₂ permits and the volume of trading under the US Acid Rain Program have been lower than expected. This can be explained by the creation and distribution of more permits than were initially authorized, by the sale of permits by high cost abaters who are subject to more stringent local emission constraints or who have irreversibly invested in high cost abatement technologies and by the deregulation of the natural gas and railroad industries which, in combination with incentives for cost-cutting under the new market approach to SO₂ control, has lowered marginal costs of abatement curves and made them more uniform across powerplants. The low price of permits and low trading volume are evidence that market approaches to pollution control can be more cost-effective than command and control regulations. The effect of public policies and technological changes on the allowance market are usefully examined in the context of an ideal market, in which the equilibrium price of allowances equals the marginal cost of abatement of individual powerplants. Using recent data from Coggins and Swinton (1996), we are able to explain the current price of permits with some accuracy.     

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.     

煤种对燃煤电厂碳排放经济性的影响研究

为了减少温室气体排放,同时保证电厂运行的经济性,本文采用VB6. 0编程实现对一台600 MW锅炉热力计算,对比分析了4种不同煤种对锅炉效率、燃煤成本的影响;基于物料平衡法重点分析煤质成分对碳排放及脱硫成本影响。结果表明:同一负荷下,低位发热量越低、收到基碳含量越高的煤种燃煤量、碳排放量越大;煤质特性和碳价共同决定燃煤成本、排碳及脱硫成本,燃用贫煤时整体经济性最差;碳价变化时,不同的煤种对应的燃煤和排碳总成本也不同。根据当前燃煤价格及碳价提前预测电厂运行经济性,对燃煤电厂合理选择煤种提供有益的参考。     

Influence of allowance allocation events on prices in China’s carbon market pilots– an AR-GARCH-based analysis

ABSTRACT

China has established seven pilot carbon markets and has made efforts to establish a national carbon market. This paper constructs an AR-GARCH model and adopts bilaterally modified dummy variables to investigate the impacts of regulatory update events (allowance allocation plans and allowance auctions) on the pilot carbon markets in China. The pilots of Guangdong, Shanghai, and Hubei are chosen as case studies. We find that each pilot reacted differently to the same events due to mechanism design diversity. The allowance allocation plan in the Shanghai and Guangdong pilot markets generated relatively distinct influences on the carbon price. Furthermore, to a certain extent, allowance auctions played a role in carbon price discovery in Guangdong and Hubei. However, such an impact was not remarkable in the Shanghai pilot market. Based on the empirical results, policy recommendations are presented for the establishment of a national carbon market.     

Symmetric and asymmetric US sector return volatilities in presence of oil,financial and economic risks

This paper examines the impacts of world, country, and sector-specific variables on the stock return volatility of twenty-seven US sectors in the short- and long-run, accounting for the asymmetric shocks based on GARCH models. In the standard GARCH model the two world variables, oil and Morgan Stanley Capital Index (MSCI), have differing impacts on the US equity sector returns’ volatility, with oil price dampening it while MSCI heightening it for most sectors. This result underlines the need for hedging more against world capital market risk relative to oil risk which is probably hedged by many sectors. The world and country factors’ impacts are not as pervasive across the board, compared with the sector-specific impacts of the P/B ratio and trading volume which affect almost all sectors. Increases in the P/B ratio would reduce the aggregate volatility, while increases in the trading volume would heighten it for all sectors. Asymmetry of factor impacts on volatility is also found for most sectors. Most of the GARCH factor results are confirmed in the CGARCH model with the exception of the impact of interest rate on the short-lived transitory volatility. Finally, interesting econometric results on the inclusion or exclusion of trading volumes are discussed.     

European CO2 prices and carbon capture investments

We assess the option to install a carbon capture and storage (CCS) unit in a coal-fired power plant operating in a carbon-constrained environment. We consider two sources of risk, namely the price of emission allowance and the price of the electricity output. First we analyse the performance of the EU market for CO₂ emission allowances. Specifically, we focus on the contracts maturing in the Kyoto Protocol's first commitment period (2008 to 2012) and calibrate the underlying parameters of the allowance price process. Then we refer to the Spanish wholesale electricity market and calibrate the parameters of the electricity price process.We use a two-dimensional binomial lattice to derive the optimal investment rule. In particular, we obtain the trigger allowance prices above which it is optimal to install the capture unit immediately. We further analyse the effect of changes in several variables on these critical prices, among them allowance price volatility and a hypothetical government subsidy.We conclude that, at current permit prices, immediate installation does not seem justified from a financial point of view. This need not be the case, though, if carbon market parameters change dramatically, carbon capture technology undergoes significant improvements, and/or a specific governmental policy to promote these units is adopted.     

On the efficiency of the European carbon market: New evidence from Phase II

I examine in the period 2008–2011 the efficiency of four carbon dioxide (CO₂) emission allowance futures traded in the Intercontinental Exchange (ICE). To this end, I assess the profitability of trading strategies based on simple technical analysis rules and naïve forecasts. The results from 2010 onwards are consistent with weak market efficiency. In turn, this finding suggests that the European carbon market is gradually attaining a state of maturity.     

碳交易市场机制发展综述

对国际和国内碳排放交易的理论和实践的发展进行了总结,在总结和分析国际碳市场发展规律的基础上对碳市场的结构、主体构成、价格形成机制、激励机制以及发展趋势等进行了分析,提出了发展我国碳排放交易市场的任务,以及建设和发展我国碳交易市场的途径。     

Experimental comparison of impact of auction format on carbon allowance market

Carbon allowances auctions are a good way to achieve the carbon allowance allocations under international agreements to address global climate change. Based on an economic experiment, this paper compares three possible carbon allowance auction formats (uniform price auction, discriminatory price auction and English clock auction) with heterogeneous bidders (coal power plants and gas power plants) from four perspectives (carbon price, auction efficiency, demand withholding and fluctuations in power supplies). Possibilities of collusion among bidders and impacts of allowance banking and penalty price on bidders’ behaviors under different auction formats are also examined. The results show that (1) when there are relatively more bidders and there are no obvious communications between them, despite there being some tacit collusion, efficiency of English clock auction is greater than the other two formats; (2) when there are relatively fewer bidders and there are obvious communications between them, explicit collusions are observed under English clock auction. In this case, discriminatory price auction helps prevent collusion to some extents; (3) in the banking scenario, more speculations are observed, while penalty price exacerbates price volatility.     

双碳目标下我国碳市场发展分析及建议

  目的  碳排放权交易（碳交易）在全球范围内正日益成为有效促进温室气体减排的市场机制或政策工具。面向“双碳”发展目标,适时开展碳排放权交易市场（碳市场）分析研究,对推动我国碳市场健康有序发展具有重要意义。  方法  梳理了欧美相对成熟碳市场的发展情况,总结了国内试点碳市场的建设经验,并对全国碳市场第一个履约期内的运行状况进行了分析。  结果  我国碳市场目前主要存在制度体系建设尚不健全、覆盖行业与交易结构较为单一、碳配额分配科学性及公平性有待提升、多市场联动效应较弱等不足。  结论  建议立足我国基本国情,未来重点围绕顶层设计、市场体系、调控机制、国际合作等方面开展工作。     

Energy caps: Alternative climate policy instruments for China?

Decoupling fossil energy demand from economic growth is crucial for China's sustainable development, especially for addressing severe local air pollution and global climate change. An absolute cap on coal or fossil fuel consumption has been proposed as a means to support the country's energy and climate policy objectives. We evaluate potential energy cap designs that differ in terms of target fuel, point of control, and national versus regional allowance trading using a global numerical general equilibrium model that separately represents 30 provinces in China. First, we simulate a coal cap and find that relative to a cap on all fossil fuels, it is significantly more costly and results in high localized welfare losses. Second, we compare fossil energy cap designs and find that a national cap on downstream fossil energy use with allowance trading across provinces is the most cost effective. Third, we find that a national fossil energy cap with trading is nearly as cost effective as a national CO₂ emissions trading system that penalizes energy use based on carbon content. As a fossil energy cap builds on existing institutions in China, it offers a viable intermediate step toward a full-fledged CO₂ emissions trading system.     

On the dynamics of gasoline market integration in the United States: Evidence from a pair-wise approach

This paper employs a pair-wise approach to examine regional integration in the US gasoline market. Using gasoline price data at the state level over a period of more than two decades, we find strong support for the view that the law of one price holds in regional markets, as more than 80% of bivariate price differentials turn out to be stationary. Furthermore, we uncover evidence that the speed at which prices converge to the long-run equilibrium depends upon the distance between states. Asymmetries are also present in this relationship. Our findings suggest that the more similar are states with respect to taxation, gas stations and refining capacity, the faster is the speed of adjustment towards the long-run equilibrium.     

Stop-loss and leverage in optimal statistical arbitrage with an application to energy market

In this paper, we develop a statistical arbitrage trading strategy with two key elements in hi-frequency trading: stop-loss and leverage. We consider, as in Bertram (2009), a mean-reverting process for the security price with proportional transaction costs; we show how to introduce stop-loss and leverage in an optimal trading strategy.We focus on repeated strategies using a self-financing portfolio. For every given stop-loss level we derive analytically the optimal investment strategy consisting of optimal leverage and market entry/exit levels.First we show that the optimal strategy á la Bertram depends on the probabilities to reach entry/exit levels, on expected First-Passage-Times and on expected First-Exit-Times from an interval. Then, when the underlying log-price follows an Ornstein-Uhlenbeck process, we deduce analytical expressions for expected First-Exit-Times and we derive the long-run return of the strategy as an elementary function of the stop-loss.Following industry practice of pairs trading we consider an example of pair in the energy futures' market, reporting in detail the analysis for a spread on Heating-Oil and Gas-Oil futures in one year sample of half-an-hour market prices.     

中外碳交易市场发展现状分析

《京都议定书》的生效,标志着国际社会开始以法律手段来限制温室气体排放,其中采取的重要机制之一就是碳排放权交易。清洁发展机制(CDM)、联合实施机制(JI)、国际排放权交易体系(IET)三种灵活机制作为碳金融工具,在关键国家和地区实施并迅速发展。CDM和JI是基于项目的市场,IET是基于配额的市场。目前国际碳交易市场以配额为主体,以项目交易为补充。西方发达国家已建成了全球性的碳交易市场,其中欧盟排放交易体系(EU ETS)是目前全球最大的排放交易体系。近年全球碳交易量及交易额迅速增长,预计2020年有望分别达到440×108t和5799亿美元,国际金融机构也积极参与碳交易市场。我国碳交易市场仍处于起步阶段,目前还只有CDM一种交易机制,国家已批准在7省市成立碳排放权交易试点。截至2013年6月底,我国签发的CDM项目数占到世界总量的61.76%。针对目前国内存在的问题,建议国家应设法扩大碳金融的影响力,建立统一的排放权交易平台,加强金融业对CDM项目的支持,完善碳金融法律框架,加大知识产权保护力度,同时要大力发展中介市场。     

The initial impact of EU ETS verification events on stock prices

This paper studies the impact of verified emissions publications in the European Emissions Trading Scheme (EU ETS) on the market value of participating companies. Using event study methodology on a unique sample of 368 listed companies, we show that verified emissions only resulted in statistically significant market responses when the carbon price was high and allowance scarcity was anticipated. The cross-section analysis of abnormal returns surrounding the publication of verified emissions shows that share prices decrease when actual emissions relative to allocated emissions increase. This negative relationship between allocation shortfalls and firm value is only significant for firms that are either carbon-intensive, compared to sector peers, or are less likely to pass through carbon-related costs in their product prices. The results suggest that although the EU ETS has been deemed unsuccessful so far due to over-allocation and low carbon price, shareholders initially perceived allowance holdings as value relevant. Our results highlight that a significant carbon market price and addressing pass-through costing are essential for successful future reforms of the EU ETS and other analogous carbon cap-and-trade systems implemented or planned worldwide.     

Exchange rate of the US dollar and the J curve: the case of oil exporting countries

This study examines the effects of changes in the exchange rate of the US dollar on the trade balances of three oil-exporting countries, namely Iran, Venezuela and Saudi Arabia. An exchange rate pass-through model is applied to allow changes in the exchange rate of the dollar to affect prices of traded goods. Then, the impact of changes in prices on the quantities of imports and exports of these economies is estimated. The results suggest a partial exchange rate pass-through to these countries’ import and export prices in terms of the US dollar. While the three countries raise the price of their primary export (namely crude oil) in response to a depreciation of the dollar, Saudi Arabia's long-run pricing strategy in securing a larger market share stands in contrast to that of the two other OPEC members. The sum of the estimated long-run price elasticities of demand for imports and exports is found to exceed unity for Iran and Venezuela, but less than unity for Saudi Arabia.