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Carbon Pricing

Selected e-articles

Abstract: Drawing on the recent enthusiasm in the carbon markets, I examine the impact of carbon prices on firm greenhouse gas (GHG) emissions. Using a sample of 1591 firms from 23 European countries, I demonstrate that an increase in carbon price decreases corporate GHG. At hypothesized higher carbon pricing levels, I document that the effect of pricing on corporate GHG emissions is negative. The negative impact of high carbon prices manifests in other harmful gases such as sulphur and volatile organic compounds (VOCs). In evaluating how the various phases of the EU emission trading scheme have affected firm greenhouse gas emissions, I show that the negative effect of pricing became pronounced in Phase 3 of the EU ETS. The findings from this study are robust to alternative econometric specifications and further sample selection criteria. •Using a sample of EU firms, I examine the role of carbon pricing in corporate carbon abatement efforts.•An increase in carbon price is associated with a decrease in firm greenhouse gas emissions.•At hypothetical higher prices of carbon, the relationship remains albeit the magnitude decreases.•Carbon price reduces firm emission of sulphur and volatile organic compounds (VOCs).•Carbon prices were more effective at Phase 3 of the EU ETS.

Abstract: There is continuing debate about which climate-policy instruments are most appropriate to reduce emissions. Undertaking a global survey among scientists who published on climate policy, we provide a systematic overview of (dis)agreements about six main types of policy instruments. The survey includes various fields across the social and natural sciences. The results show that, on average, all instruments are considered important, with direct regulation receiving the highest rating and adoption subsidies and cap-and-trade the lowest. The latter is surprising given the theoretical advantages and real-world success of the EU-ETS. Next, clustering scientific fields based on how important they consider the instruments, we determine five distinct groups, with (a) ecological economists and (b) mathematics/computer science being most dissimilar from other discipline clusters. We explain disagreement through assessing the relative importance assigned to policy criteria effectiveness, efficiency, equity and socio-political feasibility, as well as researchers' attitudes and background. Paying special attention to carbon pricing, motivated by its contested key role, we identify three respondent clusters, namely ‘enthusiasts’, ‘undecided’, and ‘skeptics’. Examining various policy arguments, we find that agreeing that carbon pricing effectively limits energy/carbon rebound and has potential to be harmonized globally have the strongest association with giving importance to this policy. •We survey researchers from diverse fields to examine views on climate policies.•Direct regulation is on average rated as most important.•Environmental and ecological economists hold contrasting views on cap-and-trade.•Support for carbon pricing relates to expectations of curbing rebound and global harmonization.•Many other factors are assessed, such as policy criteria, climate worry and ideology.

Abstract: This article analyzes the impact of the EU ETS Phase IV announcement on the performance of the regulated sectors. Using data from 347 sectors located within the OECD over the period 1995–2019, we observe that regulated sectors have reacted in line with Porter's hypothesis. Specifically, we show that regulated sectors reacted immediately after the announcement by gradually increasing their R&D spending. This increase in investment makes it possible to substitute labor with more environmentally-friendly capital, thereby improving production and competitiveness in regulated sectors. This article studies the reaction of sectors regulated by the European Emissions Trading Scheme (EU ETS) to the announcement of Phase IV. Using a Difference-in-Differences approach and data from 347 sectors located within the OECD over the period 1995–2019, we show that regulated sectors reacted immediately after the announcement by gradually increasing their R&D spending. Furthermore, these increases in investment boosted the competitiveness of firms in the regulated sectors through higher output, despite a reduction in total employment. Consequently, our results show that the EU ETS leads to a progressive substitution of labor by more productive capital. Overall, we provide evidence on firms' responses to Phase IV of the EU ETS.

Abstract: The European Union (EU) Emissions Trading System (ETS) has been established for more than 15 years, but limited attention has been given to how the changing political environment may affect the policy. We address this gap by investigating how the EU enlargement after 2004 affected the ETS and how the effects have been buffered. We develop a framework of institutional resilience to investigate how the established norms and institutional constellation of the EU legislative triumvirate have been instrumental for buffering the effects of the enlargement on ETS policymaking. We find that the existing power structure and functional complementarity of the EU legislative settings have fostered a consensus-building atmosphere in the ETS decision-making to accommodate preference heterogeneity and to absorb the compositional impact after the enlargement. The findings highlight the importance of contextual factors and institutional settings in ETS analysis and suggest a new perspective for assessing dynamic ETS performance.

Abstract: To avoid penalizing exporters that already paid carbon prices, the EU Carbon Border Adjustment Mechanism credits carbon taxes and Emissions Trading Schemes in third countries. By excluding instruments of traditional regulation (e.g. emission standards) and indirect carbon prices (e.g. fuel excise taxes) from this crediting mechanism, the EU is criticized for discriminating against countries that do not follow its climate model, in breach of international trade and climate law. This article seeks to nuance this criticism by arguing that the calculation of actual emissions (instead of default values) under the EU CBAM allows exporters to reflect compliance with foreign emission standards, and thus respects states' right to pursue emission reductions through traditional regulation. However, amendments of the CBAM Regulation are necessary to recognize the positive and negative impact of indirect carbon prices on decarbonization, and the role of carbon-crediting mechanisms in equalizing carbon costs in a more flexible and equitable way.

Abstract: This paper presents valuation models of emission allowance options under an emission trading scheme, operating in an open trading phase, where unused allowances are banked to subsequent phases without any limit. Empirical studies are carried out to show that allowance option prices exhibit similar volatility smiles to those of the stock market. Three reduced-form econometrics models, namely a Lognormal allowance price model, a Skewness–Kurtosis-Modified Lognormal allowance price model, and a Mixture Lognormal allowance price model are introduced, with each being accorded with a rich interpretation of its own. Numerical illustration of the models is performed through calibration to the European-Union Emission-Trading-Scheme’s allowance futures option prices collected for EU ETS Phase 3 and Phase 4 respectively, where statistical fitness of the models is assessed comparatively within each sample and across the two samples collected to ensure robustness of the conclusions. Valuation models of emission allowance options under an emission trading scheme in an open trading phase. Allowance returns share similar stylized facts to those of the stock market. Three reduced-form econometrics models: lognormal allowance price, skewness-kurtosis-modified lognormal allowance price, and a mixture lognormal allowance price. Calibration to European-Union Emission-Trading-Schemes allowance futures option prices. Skewness-kurtosis-modified lognormal allowance price model underprices out-of-money options, while mixture lognormal allowance price model overprices out-of-money options.

Abstract: This article analyzes the recently decided EU-wide emission trading scheme for road transport and heating fuels. The so-called ETS2 is part of the ‘Fit for 55’ policy package, which also includes tighter vehicle emission standards, a reform of energy taxation, provisions to enhance advanced fuel infrastructure and a Social Climate Fund to alleviate financial pressure for low-income households. We argue that the ETS2 should be understood as an element of a broader policy mix, which considers multiple market failures, fairness both within and across EU member states within the institutional constraints of EU policy making. We conclude by discussing specific potential modifications to the design of the ETS2 that could help achieve the EU's climate target in an efficient and equitable way. These include linking ETS and ETS2, reducing price volatility, increasing the size of the Social Climate fund, and clarifying penalties for countries missing targets under the Effort Sharing Regulation. Various measures complement EU carbon pricing in heating and transport. Distributional concerns, within and across countries, are key to policy design. Various measures aim to ensure prices in ETS2 remain limited. Continued inclusion of ETS2-sectors in ESR ensures rich EU countries must mitigate. We propose further evolution of ETS, including linking, price corridors, larger SCF. Highlights: Political and economic analysis of the policy mix to decarbonize road transport with a special focus on the role of the recently decided new emissions trading scheme for this sector.

Abstract: In this paper, we evaluate the causal effects of climate policies on carbon emissions reduction. Specifically, we investigate the properties of the Granger causality test in the frequency domain, assuming that the dependent variables include a binary variable and a continuous variable (resp. treatment and outcome variables). Monte Carlo simulations confirm that: (i) this test is valid under this assumption; and (ii) it has more power than its time-domain counterpart. Then, using Sweden as a case study, we evaluate the impact of the Kyoto Protocol, the Swedish carbon tax, and the European Union Emissions Trading System (EU ETS) on carbon emissions reduction over the period 1964–2021. Our empirical results indicate that only the carbon tax Granger causes carbon emissions reduction in the long run. Our methodological framework offers policymakers a useful toolbox for climate policy evaluation as well as new insights into the outcomes of international treaties and carbon pricing policies. •We investigate the properties of the Granger causality test in the frequency domain, assuming that the dependent variables include a binary variable and a continuous variable.•Monte Carlo simulations confirm that: (i) this test is valid under this assumption; and (ii) it has more power than its time-domain counterpart.•Using Sweden as a case study, we evaluate the impact of three climate policies on carbon emissions reduction over the period 1964–2021.

Abstract: The expansion of wind and solar energy has so far primarily led to the decarbonization of the electricity sector. Against this background, power-to-gas (PtG) is seen as a solution supporting the decarbonization of other sectors, such as heating or transport. As the generation mix will transitionally be based on fossil-fired generation technologies, the upcoming integration of PtG into electricity markets comes with several challenges. While the current debate focuses on sustainability criteria and support mechanisms, integration of PtG into electricity markets requires a further development of the market design. Notably, the design of electricity markets and carbon pricing should create efficient incentives for utilizing PtG, reflecting the value of the CO2 emissions avoided by electrolytic hydrogen or methane. General effects are analyzed to study the role of carbon pricing in integrating PtG. Moreover, a detailed bottom-up market model is extended by the PtG technology and competing flexibilities, such as storage or demand-side management. Several scenarios are developed regarding levels of CO2 price, techno-economic parameters of flexibilities and shares of variable renewable energy sources for 2025. The results reveal that carbon pricing has to reflect both the avoided and the induced CO2 emissions related to electrolytic hydrogen or methane to support the market integration of PtG during the ramp-up phase. On the contrary, too low CO2 prices might lead to adverse effects. Subsequently, implications for energy policy are discussed. •Systematic analysis of the general effects of carbon pricing on power-to-gas•Development of a model framework covering competing flexibility options•Analysis of system effects and impacts on electrolyzers•Crediting for CO2 emissions avoided by electrolytic hydrogen or methane supports the market integration of power-to-gas•Too low carbon prices lead to inefficient price signals and adverse effects on CO2 emissions

Abstract: Carbon pricing is a policy instrument that is very popular with researchers and many policy makers as well. To be implemented effectively, it requires widespread acceptance by society. This paper presents an empirical study carried out in Germany directly before the implementation of its new carbon-pricing scheme for fuels in 2021. The empirical study with 83 participants focused on how different revenue use options were perceived by population groups that are particularly burdened by carbon pricing: single parents with commutes, social welfare recipients, long-distance commuters as well as pensioners with large homes. The study applied a mixed methods design involving focus group participants also completing questionnaires. The findings show a good level of acceptance of carbon pricing in view of the need to mitigate climate change and the widespread expectation that the revenues will be used to achieve this. The preferred option for revenue use are public investments in sustainable transport and climate protection. Overall, the topics discussed were often perceived as complex. The paper concludes by recommending policy makers to use combinations of revenue uses and to ensure that the overall impacts of carbon pricing and revenue use are visible to the public. •Acceptance of carbon pricing by particularly burdened groups is investigated.•In a mixed methods design, focus groups were combined with questionnaires.•The need for carbon pricing was acknowledged but discussed critically.•Participants preferred revenues to be invested in public infrastructure.•Visibility of the effects of carbon pricing needs to be enhanced.

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