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On December 29, 2017, China's Carbon Trading Scheme (ETS) was officially launched, and it may be the largest emission trading platform in the world. This paper establishes 5 counter-measured scenarios based on the recently launched China's national ETS market and constructs a dynamic recursive Computable General Equilibrium model to study the impact of national ETS on the economy, energy, and environment. We find that the national ETS will have a negative impact on GDP by 0.19%–1.44%. The national ETS can significantly increase the price of electricity, however, the increase in the prices of other commodities will be much lower than that of electricity. As long as the mechanism of the ETS market remains unchanged, emission reduction per year will increase linearly. Economic output and CO2 emission are sensitive to Annual Decline factor (ADF). This paper argues that China's national ETS market is an effective tool to reduce CO2 emission, and we suggest that ADF could be 0.5% when allocating carbon allowance for the electricity sector. This could balance economic output and CO2 reduction. Also, it is easy to achieve the goal of “double control” (total amount and intensity) in China.

China's emissions trading pilots constitute an emerging and young commodity market. This paper compares the greater regional divergences of market rules and explores the impacts of market fragmentation and liquidity on emissions allowances prices in eight of China's emissions trading scheme (ETS) pilots using a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model with a generalized error distribution (GED). The Hubei, Guangdong and Shenzhen ETS pilots have obviously greater market shares and higher liquidity than the Beijing, Shanghai, Tianjin, Chongqing and Fujian ETS pilots. Market fragmentations have significant impacts on emissions allowance returns in the Beijing, Guangdong and Hubei ETS pilots; illiquidity ratios and trading values have significant influences on emissions allowance returns in the Beijing, Shanghai, Tianjin, Hubei and Fujian ETS pilots; and the variances in market fragmentation and liquidity in the Beijing, Shenzhen and Hubei ETS pilots have more persistent impacts on the variances in emissions allowance returns than the Shanghai, Tianjin, Guangdong and Chongqing ETS pilots. Greater market fragmentation, insufficient allowance transactions, longer trade intervals and poorer information transparency result in lower liquidity and pricing efficiency. Finally, some suggestions are offered to improve market liquidity and pricing efficiency in China's emissions trading scheme pilots.

Textbook theory of linking carbon systems suggests linking reduces marginal abatement costs. Contrasting theoretical work and policy analyses suggests that linking, or at least unfettered linking, may not always be beneficial. The New Zealand Emissions Trading Scheme (NZ ETS) is unique in that, until 2013, it allowed unlimited use of Kyoto allowances. NZ ETS, thus provides an ideal context to explore the effect of linking and linking restrictions on carbon pricing of small systems. Using data on importation and exportation of allowances, we provide the first empirical analysis of the determinants of allowance prices in the early phase of the NZ ETS. Our results indicate that imports of offsets rather than fundamentals have been the major price determinant. Moreover, the pricing of New Zealand units (NZUs) can be placed into three distinct periods, delineated by two structural breaks. In the first period, the system is largely autarkic; in the second period, as international offset prices drop below the NZU price, the system becomes a “price taker”; in the final period, following policy interventions, the system regains some independence. The case of the NZ ETS shows that small trading systems need to impose, or have the option to impose, quantitative import restriction so as to reap the benefits (lower abatement cost), but not the drawbacks (“importation” of distortions and market integrity issues), of linking.

This study tests the effects of oil shocks on the returns of the European Union's carbon emission allowance (EUA) under different market conditions by using a quantile regression method. Furthermore, the research looks into whether the link between oil shocks and the returns of the EUA has any asymmetry or lagged effects. The results show that oil supply and demand shocks have a positive effect on the returns of the EUA, but oil risk shocks have a negative effect. Meanwhile, oil shocks tend to be stronger under bearish and normal market conditions. Moreover, we find the asymmetry of oil demand and risk shocks is more clearly reflected in bearish market conditions. However, the asymmetry of oil supply shocks is more reflected in bullish market conditions. Finally, we discover the lagged effect between oil demand and risk shocks is significant at lag one trading day and weakens or disappears at other lags. But the lagged impact of oil supply shocks is significant for lag one trading day in a bearish market and normal market conditions but significant at lag eight trading days in bullish market conditions.

Linking the EU and Chinese Emission Trading Systems (ETS) increases the cost-efficiency of reaching greenhouse gas mitigation targets, but both partners will benefit – if at all – to different degrees. Using the global computable-general equilibrium (CGE) model DART Kiel, we evaluate the effects of linking ETS in combination with 1) restricted allowances trading, 2) adjusted allowance endowments to compensate China, and 3) altered Armington elasticities when Nationally Determined Contribution (NDC) targets are met. We find that generally, both partners benefit from linking their respective trading systems. Yet, while the EU prefers full linking, China favors restricted allowance trading. Adjusted allowance endowments which shift reduction obligations to the EU cannot sufficiently compensate China so as to make full linking as attractive as restricted trading. Gains associated with linking increase with higher Armington elasticities for China, but decrease for the EU. Overall, the EU and China favor different options for linking ETS. Moreover, heterogeneous impacts across EU countries could cause dissent among EU regions, potentially increasing the difficulty of finding a linking solution favorable for all trading partners.

We theoretically and numerically analyse the impacts for a small, open country with carbon abatement ambitions of joining a coalition with allowance trading. Besides welfare impacts for both the coalition and the small, open economy joining the coalition, we scrutinise how the studied policy options differ with respect to their distributional impacts across domestic income groups. Our example is the EU 2030 policies and Norway's linking to it. In spite of theoretical ambiguity, the findings suggest that the tighter the links with the EU, the lower the abatement costs for Norway. The distributional profile of the welfare costs tends to be progressive, i.e., the relative (and absolute) incidence of the carbon policy falls more heavily on wealthy households than poor households, regardless of the choice of linking options. However, the less progressive, the lower the overall welfare cost. This indicates a trade-off between efficiency and distribution concerns. A national cap-and-trade system without linking to the EU is the least cost-effective option for Norway but also the most progressive as the higher income deciles face lower capital return and wages.

This paper investigates the asymmetric relationship between oil shocks and the carbon emission trading market in China using the nonlinear autoregressive distributed lag (NARDL) model. The results show that: oil shocks have a long-run asymmetric effect on carbon allowance prices, and the oil supply shock is the main factor causing carbon allowance price changes in 2013–2020. The oil supply shock and oil demand shock cause the price of carbon allowances to rise, and the oil risk shock causes the price of carbon allowances to decrease. Moreover, we consider the impact of establishing a unified carbon market in 2017. We find that the main factors affecting carbon allowances' price have changed from oil demand shocks to oil supply shocks. This provides a meaningful reference for the establishment and improvement of China's carbon trading market.

This study examines the stochastic convergence of per capita fossil fuel consumption across U.S. states (including the District of Columbia) utilizing LM and RALS-LM unit root tests with allowance for endogenously determined structural breaks. Our results indicate that with the exception of Nevada, the evidence from two-break and one-break LM and RALS-LM unit root tests rejects the null hypothesis of a unit root in the relative per capita fossil fuel consumption in the U.S. This finding indicates the presence of stochastic convergence in relative per capita fossil fuel consumption in the U.S. states.

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.

Korea will introduce an emission trading policy from 2015. The rules for the initial allocation of emission allowances have not been decided yet. This paper assesses the effect of various initial emission allowance allocation methods of the Korean electricity market. This study employs the mixed complementarity problem, which is able to incorporate operation, investment, and emission trade decisions in the deregulated electricity market in order to provide more realistic results. In particular, the allocation rules to existing plants and new entrants are modeled separately in this study. The model quantifies the impacts of different allocation rules on emissions, capacity mix, emission allowance prices, electricity prices, and social welfare. We examine typical allocation rules such as auction to all power plants, best available technology (BAT) benchmark to all power plants, fuel-specific benchmark to existing power plants along with BAT benchmark to new entrants, and fuel-specific benchmark to all power plants. We find that giving free allocations to new power plants prompts more new investment and this raises overall social welfare even though the direct cost of achieving the emission reduction target rises. While the auction is the most powerful policy to reduce emissions in the electricity sector, giving away permits to all power plants based on a fuel-specific benchmark encourages investment, increases output, and leads to a greater level of welfare from an imperfectly competitive industry.

The overlapping impact of the Emission Trading System (ETS) and renewable energy (RE) deployment targets creates a classic case of interaction effects. Whereas the price interaction is widely recognized and has been thoroughly discussed, the effect of an overlapping instrument on the abatement attributable to an instrument has gained little attention. This paper estimates the actual reduction in demand for European Union Allowances that has occurred due to RE deployment focusing on the German electricity sector, for the five years 2006 through 2010. Based on a unit commitment model we estimate that CO2 emissions from the German electricity sector are reduced by 35 to 60 Mtons, or 10% to 18% of what estimated emissions would have been without any RE policy but with the CO2 price remaining in place at the observed level. Furthermore, we find that the abatement attributable to RE injections is greater in the presence of an allowance price than otherwise. The same holds for the ETS effect in presence of RE injection. This interaction effect is consistently positive for the German electricity system, at least for the considered years, and on the order of 0.5% to 1.5% of emissions. Published version of EUI RSCAS WP 2012/18 [Loyola de Palacio Chair] Climate Policy Research Unit

Unlike previous studies which mainly focus on the integration properties of energy consumption and production, this study examines the convergence of per capita energy use among 25 OECD countries over the period 1960 to 2010. In particular, newly developed LM and RALS-LM unit root tests with allowance for two endogenously determined structural breaks are employed. The results indicate significant support for per capita energy use convergence among OECD countries.

This paper examines the possibility of asymmetric transmission of CO 2 prices to electricity futures prices in the second phase of the European Emission Trading Scheme. We would like to assess whether output prices tend to respond more quickly to input price increases than decreases: this phenomenon is known as “rockets and feathers” in the literature. Compared to Zachmann and von Hirschhausen (2008), who carried out a similar analysis for Germany in the first phase of the Emission Trading Scheme with data from 2005 to 2006, our study spans a longer timeframe (July 2007–June 2010), with a presumably more mature permit market, and includes three additional European countries (France, Belgium and the Netherlands). Results do not provide empirical evidence of statistically significant differences in the response of power prices to positive and negative shocks in CO 2 allowance and fuel markets.

The policy instrument many economists favor to reduce greenhouse gas emissions and to shift new investment towards low carbon technologies is the tradable allowance system. Experience with this instrument has been mixed, with a crucial design issue being the choice of whether to auction allowances to firms, or to grandfather them based on historical emissions. In this paper, we examine the changing incentives of investment in different technologies, when investors are risk averse and are expecting an allowance system with a certain allocation rule but do not know if the policy is going to take place in the near future. Investors also cannot fully predict future investment costs for the low-carbon technology. We apply a game theoretic model to examine the combined effects of uncertainty and risk aversion on the actions of potential investors into high and low carbon generating capacity, under both allocation rules and uncertain costs. We find that uncertainty and risk aversion do have implications towards investment incentives. We discuss policy implications of these findings.

Frequently a firm sets a capital allowance for its risk management program such that early liquidation is dictated when the loss from the derivative position exceeds the allowance. Using a two-period framework, we show that the early liquidation decision is supported when futures returns exhibit positive first-order autocorrelation. An empirical study concerning natural gas acquisition of a local distribution company (LDC) demonstrates possibilities of early liquidation underlying optimal hedge policies.