Climate policies for road transport revisited (I): Evaluation of the current framework

The global rise of greenhouse gas (GHG) emissions and its potentially devastating consequences require a comprehensive regulatory framework for reducing emissions, including those from the transport sector. Alternative fuels and technologies have been promoted as a means for reducing the carbon intensity of the transport sector. However, the overall transport policy framework in major world economies is geared towards the use of conventional fossil fuels. This paper evaluates the effectiveness and efficiency of current climate policies for road transport that (1) target fuel producers and/or car manufacturers, and (2) influence use of alternative fuels and technologies. With diversifying fuel supply chains, carbon intensity of fuels and energy efficiency of vehicles cannot be regulated by a single instrument. We demonstrate that vehicles are best regulated across all fuels in terms of energy per distance. We conclude that price-based policies and a cap on total emissions are essential for alleviating rebound effects and perverse incentives of fuel efficiency standards and low carbon fuel standards. In tandem with existing policy tools, cap and price signal policies incentivize all emissions reduction options. Design and effects of cap and trade in the transport sector are investigated in the companion article (Flachsland et al., in this issue).     

Korea׳s emission trading scheme and policy design issues to achieve market-efficiency and abatement targets

In 2008, the government of Republic of Korea (Korea) announced the national abatement target aiming at 30% reductions from the Business-as-Usual projections by 2020. Accordingly, the Emission Trading Scheme (ETS) will be implemented from 2015 onwards. As ETS performance substantially depends on the structural design, it is critically important to examine the details of Korean ETS for the achievement of cost effectiveness and concurrent development of an active emission trading market. This paper addresses several policy design issues for this purpose. After providing an overview on the current framework of Korean ETS, we propose ways to achieve flexibility, consistency and market efficiency of the program in consideration of the preexisting policies. Issues in policy design are discussed by focusing on allowance allocation, market stabilization measures and price mechanism in the emission and energy markets in Korea. This paper will serve as a practical guideline for establishing sustainable and market-efficient Korean ETS that can be compatible with the international standards as in the EU ETS.     

Emission abatement: Untangling the impacts of the EU ETS and the economic crisis

In this study we use historical emission data from installations under the European Union Emissions Trading System (EU ETS) to evaluate the impact of this policy on greenhouse gas emissions during the first two trading phases (2005–2012). As such the analysis seeks to disentangle two causes of emission abatement: that attributable to the EU ETS and that attributable to the economic crisis that hit the EU in 2008/09. To do so, we use a dynamic panel data approach. Our results suggest that, by far, the biggest share of abatement was attributable to the effects of the economic crisis. This finding has serious implications for future policy adjustments affecting core elements of the EU ETS, including the distribution of EU emission allowances.     

Emissions trading beyond Europe: Linking schemes in a post-Kyoto world

This paper assesses the economic impacts of linking the EU emissions trading scheme (ETS) to emerging schemes beyond Europe in the presence of a post-Kyoto agreement in 2020. Numerical simulations with a multi-country equilibrium model of the global carbon market show that linking the European ETS induces only minor economic benefits. As trading is restricted to energy-intensive companies that are assigned high initial emissions, the major compliance burden is carried by the non-trading industries excluded from the linked ETS. In the presence of parallel government trading under a post-Kyoto Protocol, the burden of the excluded sectors can be substantially alleviated by international permit trade at the country level. However, the parallel carbon markets of linked ETS companies and post-Kyoto governments are still separated here. From an efficiency perspective, the most desirable future climate policy regime is thus represented by a joint trading system facilitating international emissions trading between ETS companies and post-Kyoto governments. While the Clean Development Mechanism is not able to attenuate the inefficiencies within linked ETS, in a parallel or joint trading regime the economy-wide access to project-based abatement options in developing countries induces large additional cost-savings.     

Allowance allocation matters in China's carbon emissions trading system

China's national carbon emissions trading system (ETS) initially started by covering the power generation sector with a rate-based allocation of emission allowances. This single-sector ETS scheme is a tradable performance standard and loosens the participants' emission abatement effort. Given the stringent emission reduction targets implied by China's Nationally Determined Contributions (NDCs) and the expectation that ETS will cover more sectors in the future, we simulate a national ETS of ten carbon-intensive sectors with mass-based, output-based allocation (OBA) of emission allowances. We uncover the impacts and mechanisms of this ETS by comparing the sectoral abatement behaviors across policy scenarios with varying allocation schemes and numbers of benchmarks. We evaluate if the simulated ETS meets important efficiency principles and exhibits desired features. The results show that this ETS achieves China's NDCs with modest macroeconomic losses. The mass-based OBA leads to evenly distributed emission reduction efforts for all ETS participating sectors. It also limits the emission trading volumes and results in slight to modest impacts on sectoral output, especially for the upstream sectors. OBA with fewer benchmarks enhances emission abatement efforts with the caveats of relatively cleaner participants being subsidized by the ETS and slightly higher impacts on the macroeconomy.     

Designing a climate change policy for the international maritime transport sector: Market-based measures and technological options for global and regional policy actions

The international maritime transport sector has a significant abatement potential and some technical improvements that reduce GHG emissions would already be profitable without any policy in place. This paper analyses in-depth the limits and opportunities of policy options currently under consideration at the international level to stimulate the sector to reduce its GHG emissions. In particular, in order for the maritime transport sector to become more environmentally friendly, the flexible nature of international market-based measures and the European Union Emission Trading Scheme provide a definite window of opportunity without placing unnecessary high burden on the sector. However, the development of a regional policy, such as at European level, for the international maritime transport sector faces several obstacles: allocation of emissions, carbon leakage, permit allocation, treatment of the great variety in ship type, size and usage, and transaction cost. Global market-based policies could overcome most of these challenges.     

The long-term impact of the market stability reserve on the EU emission trading system

To provide a strong price signal for greenhouse gas emissions abatement, Europe decided to strengthen the European Union Emissions Trading System (EU ETS) by implementing a market stability reserve (MSR) that includes a cancellation policy and to increase the linear reduction factor from 1.74% to 2.2% after 2020. Results of a detailed long-term investment model, formulated as a large-scale mixed complementary problem, show that this strengthened EU ETS may quadruple EUA prices and may decrease cumulative CO₂ emissions with 21.3 GtCO₂ compared to the cumulative cap before the strengthening (52.2 GtCO₂). Around 40% of this decrease (8.3 GtCO₂) is due to the increased linear reduction factor and 60% due to the cancellation policy (13 GtCO₂). Without the increased linear reduction factor, the MSR's cancellation policy would decrease emissions by only 4.1 GtCO₂, indicating their complementarity. A sensitivity analysis on key model assumptions and parameters reveals that the impact of the MSR is, however, strongly dependent on other policies (e.g., renewable energy targets, nuclear, lignite and coal phase-outs) and cost evolutions of abatement options (e.g., investment cost reductions for wind and solar power). This renders the effective CO₂ emissions cap highly uncertain. In our simulation results, cancellation volumes range between 5.6 and 17.8 GtCO₂, which is to be compared with our central estimate of 13 GtCO₂. We calculate the required linear reduction factors to achieve these CO₂ emission reductions without an MSR, which would remove all uncertainty on the cumulative CO₂ emissions and interference with other complementary climate or energy policies.     

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.     

Quantifying CO2 abatement costs in the power sector

CO₂ cap-and-trade mechanisms and CO₂ emission taxes are becoming increasingly widespread. To assess the impact of a CO₂ price, marginal abatement cost curves (MACCs) are a commonly used tool by policy makers, providing a direct graphical link between a CO₂ price and the expected abatement. However, such MACCs can suffer from issues related to robustness and granularity. This paper focuses on the relation between a CO₂ emission cost and CO₂ emission reductions in the power sector. The authors present a new methodology that improves the understanding of the relation between a CO₂ cost and CO₂ abatement. The methodology is based on the insight that CO₂ emissions in the power sector are driven by the composition of the conventional power portfolio, the residual load and the generation costs of the conventional units. The methodology addresses both the robustness issue and the granularity issue related to MACCs. The methodology is based on a bottom-up approach, starting from engineering knowledge of the power sector. It offers policy makers a new tool to assess CO₂ abatement options. The methodology is applied to the Central Western European power system and illustrates possible interaction effects between, e.g., fuel switching and renewables deployment.     

Why should support schemes for renewable electricity complement the EU emissions trading scheme?

In virtually all EU Member States, the EU Emissions Trading Scheme (EU ETS) is complemented by support schemes for electricity generation from renewable energy sources (RES-E). This policy mix has been subject to strong criticism. It is mainly argued that RES-E schemes contribute nothing to emissions reduction and undermine the cost-effectiveness of the EU ETS. Consequently, many scholars suggest the abolition of RES-E schemes. However, this conclusion rests on quite narrow and unrealistic assumptions about the design and performance of markets and policies. This article provides a systematic and comprehensive review and discussion of possible rationales for combining the EU ETS with RES-E support schemes. The first and most important reason may be restrictions to technology development and adoption. These may be attributed to the failure of markets as well as policies, and more generally to the path dependency in socio-technical systems. Under these conditions, RES-E schemes are required to reach sufficient levels of technology development. In addition, it is highlighted that in contrast to the EU ETS RES-E support schemes may provide benefits beyond mitigating climate change.     

Cost-effectiveness of greenhouse gas mitigation in transport: A review of methodological approaches and their impact

A review is given of methodological practices for ex ante cost-effectiveness analysis (CEA) of transport greenhouse gas (GHG) mitigation measures, e.g. fuel economy and CO₂ standards for road vehicles in the US and EU. Besides the fundamental differences between different types of policies and abatement options which inherently result in different CEA outcomes, differences in methodological choices and assumptions are another important source of variation in CEA outcomes. Fourteen methodological issues clustered into six groups are identified on which thirty-three selected studies are systematically reviewed. The potential variation between lower and upper cost-effectiveness estimates for GHG mitigation measures in transport, resulting from different methodological choices and assumptions, lies in the order of $400 per tonne CO₂-eq. The practise of using CEA for policy-making could improve considerably by clearly indicating the specific purpose of the CEA and its strengths and limitations for policy decisions. Another improvement is related to the dominant approach in transport GHG mitigation studies: the bottom-up financial technical approach which assesses isolated effects, implying considerable limitations for policy-making. A shift to welfare-economic approaches using a hybrid model has the potential to establish an improved assessment of transport GHG mitigation measures based on realistic market responses and behavioural change.     

Should a vehicle fuel economy standard be combined with an economy-wide greenhouse gas emissions constraint? Implications for energy and climate policy in the United States

The United States has adopted fuel economy standards that require increases in the on-road efficiency of new passenger vehicles, with the goal of reducing petroleum use and (more recently) greenhouse gas (GHG) emissions. Understanding the cost and effectiveness of fuel economy standards, alone and in combination with economy-wide policies that constrain GHG emissions, is essential to inform coordinated design of future climate and energy policy. We use a computable general equilibrium model, the MIT Emissions Prediction and Policy Analysis (EPPA) model, to investigate the effect of combining a fuel economy standard with an economy-wide GHG emissions constraint in the United States. First, a fuel economy standard is shown to be at least six to fourteen times less cost effective than a price instrument (fuel tax) when targeting an identical reduction in cumulative gasoline use. Second, when combined with a cap-and-trade (CAT) policy, a binding fuel economy standard increases the cost of meeting the GHG emissions constraint by forcing expensive reductions in passenger vehicle gasoline use, displacing more cost-effective abatement opportunities. Third, the impact of adding a fuel economy standard to the CAT policy depends on the availability and cost of abatement opportunities in transport—if advanced biofuels provide a cost-competitive, low carbon alternative to gasoline, the fuel economy standard does not bind and the use of low carbon fuels in passenger vehicles makes a significantly larger contribution to GHG emissions abatement relative to the case when biofuels are not available. This analysis underscores the potentially large costs of a fuel economy standard relative to alternative policies aimed at reducing petroleum use and GHG emissions. It further emphasizes the need to consider sensitivity to vehicle technology and alternative fuel availability and costs as well as economy-wide responses when forecasting the energy, environmental, and economic outcomes of policy combinations.     

Creating a level playing field? The concentration and centralisation of emissions in the European Union Emissions Trading System

This article questions the assumption that carbon markets create a level playing field by exploring the relationship between the organisation of capital and the organisation of emissions in the European Union Emissions Trading System (EU ETS). It constructs a database by matching installations and owners to reveal that a relatively small number of large-scale coal-fired power stations, owned by a very small group of states and corporations, are responsible for a significant proportion of greenhouse gas emissions. The findings are analysed by considering how technological dependence on coal together with the corporate institutional form combine to support the socio-spatial concentration and centralisation of capital and emissions. Case studies of the consolidation of the seven largest polluting owners from Europe's coal-dependent electricity sector and the carbon trading strategies of the two largest polluters, RWE and E.ON, then assess the impacts of energy liberalisation and emissions trading policies. The article concludes that EU energy and climate policies are pulling in different directions by clustering responsibility for greenhouse gas emissions and diffusing responsibility to address climate change. The uneven distribution of emissions within the EU ETS makes an alternative policy approach that directly targets the biggest corporate and state polluters both feasible and necessary.     

Implications of CO2 reduction policies for a high carbon emitting economy

This paper uses a dynamic computable general equilibrium model to compare the macroeconomic and sectoral impacts of three environmental policies in Australia — an emissions trading scheme (ETS), an ETS combined with technological innovation in the renewable energy sector and a fuel tax as an alternative to the ETS. Overall, the impacts of the ETS were not significantly adverse. Although the fuel tax had similar impacts to the ETS on key macro-variables such as real GDP, employment, household consumption, exports and imports, it was however not effective compared to the latter in reducing emissions. Neither policy led to inflation growth of more than 0.8% for any coal mining and non-mining Australian state. At the sectoral level, the GDP growth of energy-intensive industries such as coal, iron ore, steel and coal-powered electricity generators is adversely affected while electricity generators who use gas and renewable energy sources and the forestry sector gain. It was also found that a 10% technological change in the renewable energy sector over a decade did not significantly improve the outcome when coupled with the ETS. Thus the Australian government's industry assistance to invest in low pollution technologies needs to be more aggressive to meet current and future international emission abatement targets.     

Economic impact assessment of Turkey's post-Kyoto vision on emission trading

For the post-Kyoto period, Turkey strongly emphasizes the establishment of national emission trading system by 2015 and its integration with the EU ETS along its accession process to the EU. In this paper, we study the mechanisms of adjustment and economic welfare consequences of various ETS regimes that Turkey considers to apply by 2020, i.e. regional ETS and international trading within the EU ETS. We conduct our analysis under the current EU 20–20–20 emission target, 20%, and also under its revised version, 30%. We find that Turkey has economic gains from linking with the EU ETS under the 20% cap, in comparison to the domestic ETSs. Despite the EU's welfare loss under linkage in comparison to the case where Turkey has domestic abatement efforts, it still prefers linking as it increases economic well being compared to the case where Turkey does not abate. Under 30% cutback, Turkey has critical output loss under linkage due to high abatement burden on the EU, while the EU is better off as it passes some of its abatement burden to Turkey. Therefore, emission quotas and their allocation across the ETS and non ETS sectors become highly critical in distributing the overall economic gains from bilateral trading.     

Carbon mitigation in the electric power sector under cap-and-trade and renewables policies

In Europe, CO₂ emissions from the electric power sector and energy intensive industries are capped under a cap-and-trade system (i.e., the EU ETS). When other indirect measures are taken to impact emissions in a specific sector under the cap (such as a push for renewables in the electric power sector), this has implications on the overall allowance price, and on CO₂ emissions both from this specific sector and the other sectors under the cap. The central contribution of this paper is the derivation of impact curves, which describe these interactions, i.e., the impact on allowance price and the shift of emissions across sectors. From a set of detailed simulations of the electric power system operation, a so-called “emission plane” is obtained, from which impact curves can be derived. Focus is on interactions between CO₂ abatement through fuel switching and measures affecting the residual electricity demand (such as deployment of renewables) in the electric power sector, as well as on interactions with other sectors, both in a short-term framework. A case study for Central-Western Europe is presented. The analysis reveals a substantial impact of renewables on CO₂ emissions, and hence on emissions shifts across sectors and/or on the CO₂ price.     

Coevolution of policy,market and technical price risks in the EU ETS

Within the EU, there have been calls for governments to provide greater certainty over carbon prices, even though it is evident that their price risk is not entirely due to policy uncertainty. We develop a stochastic simulation model of price formation in the EU ETS to analyse the coevolution of policy, market and technology risks under different initiatives. The current situation of a weak (20%) overall abatement target motivates various technology-support interventions, elevating policy uncertainty as the major source of carbon price risk. In contrast, taking a firm decision to move to a more stringent 30% cap would leave the EU–ETS price formation driven much more by market forces than by policy risks. This leads to considerations of how much risk mitigation by governments would be appropriate, and how much should be taken as business risk by the market participants.     

An exploration of possible design options for a binding energy savings target in Europe

As Europe is not on track in meeting its 2020 energy savings target, there has been quite some debate to make the energy savings target binding instead of indicative. Although the final draft text of the Energy Efficiency Directive left the option of a binding target explicitly open for the period beyond 2014, this statement has watered down in the adopted Directive: If still not on track mid-2014, the European Commission will propose “further measures.” In this paper, we argue that a binding energy savings target could be the first EU legal initiative to look beyond 2020 serving as a beacon for other policies such as for renewables and greenhouse gases that need redefinition after 2020. We therefore explore four possible design options of a binding savings target and assess their feasibility. We conclude that a binding target at Member State level (opposed to an EU-wide target like for the EU Emission Trading System (ETS)) is the most feasible. A binding target at Member State level would ensure political accountability and commitment to deliver results while providing flexibility to choose and apply the most suitable tools to achieve the target. It could provide a framework to guide ambitious and coherent implementation of EU energy efficiency policies, as well as the strengthening of national policies. Furthermore, binding targets at Member State level will make Member States take an ambitious position in Brussels when new energy or CO₂ performance standards for appliances and transport modes are to be set. A Member State binding target applied to end-users (excluding ETS companies) is a design option that covers the vast majority of the cost-effective energy savings potential, maintains the flexibility for ETS companies, and supports the most cost-effective achievement of a greater share of renewables.     

Domestic offset projects in the built environment

Emission reduction activities in the European Union (EU) in- and outside the European Trading System (ETS) thus far have largely taken place separately. One possibility to combine the two is through linking Non-ETS offset project-based crediting schemes in the form of Joint Implementation or domestic offset (DO) projects with the EU ETS. Linking would allow non-ETS offset project-based CO₂ credits to be traded within the ETS market. This paper discusses the merits and drawbacks of the implementation of a DO scheme in the built environment in the Netherlands. The built environment can be characterised as a sector with a great diversity and significant energy savings potential. Emphasis is paid on the modalities for estimating energy savings under DO projects. The authors discuss if next to existing EU, national or regional policies in the Netherlands, DO could spur initiatives in sub-sectors or market areas that are difficult to reach with conventional policy instruments. Thus, despite the existing policy framework in this sector, there could be still space for DO to reach the untapped energy savings potential. DO can support activities and technologies that are not covered by other policy instruments, either because they are not part of the instruments focus or are above the minimum requirements of the incumbent policy targets. It is expected that some lessons from this study in the Netherlands can be taken into account also by other countries facing similar market circumstances, which have implemented several policy instruments and are considering DO schemes as an alternative for capturing part of the untapped energy saving potential in their end use sectors. Another possible advantage of DO is that is has the potential to reduce public spending on existing policy goals, when it is considered in conjunction with existing public financing instruments. In order to tap into this potential, there are a series of hurdles in place, like additionality and the current CO₂ price levels, while transaction and administration costs must be kept low.     

A literature-based multi-criteria evaluation of the EU ETS

This article reviews the existing literature on the European Union Emission Trading Scheme (EU ETS), focusing on empirical ex-post research since the end of the first period (2007). The literature is presented through a multi-criteria evaluation. Concerning environmental effectiveness, despite over-allocation during the first period, abatement is estimated between ?2.5% and ?5%. Trade-driven carbon leakage was not observed, even if long-term economic models predict divergent leakage estimates for certain at-risk sectors. The abatement target was likely to be below an economically efficient level, but was reached in a fairly cost-effective way, even if free allocation gave rise to several distortional effects. Equity concerns were manifold and constitute a major drawback to the policy. Finally, institutional feasibility can be considered positive in that the EU ETS passed the European legislative process, unlike the previously proposed EU-wide carbon tax.