Advanced Search
MyIDEAS: Login

The emissions trading paradox

Contents:

Author Info

  • Jaehn, Florian
  • Letmathe, Peter
Registered author(s):

    Abstract

    This article considers the price history of CO2 allowances in the EU Emission Trading Scheme. Since European Emissions Trading started in 2005, the prices of allowances have varied between less than one and thirty Euro per ton of CO2. This previously unpredicted volatility and, more notably, a significant price crash in May 2005 led to the hypothesis that electricity producers might use their market power to influence the prices of allowances. Besides market power, the combination of information asymmetry and price interdependencies (between prices of primary goods - especially electricity - and allowances) plays an important role in explaining the emissions trading paradox. The model presented will show that banking can lead to such a price crash if market participators act rationally. Furthermore, in such a scenario banking can be profitable for sellers at the cost of buyers.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6VCT-4W9XDVM-1/2/5c68157452f6b32de371577e866d665b
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal European Journal of Operational Research.

    Volume (Year): 202 (2010)
    Issue (Month): 1 (April)
    Pages: 248-254

    as in new window
    Handle: RePEc:eee:ejores:v:202:y:2010:i:1:p:248-254

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/eor

    Related research

    Keywords: Emissions trading Banking Energy Cooperative game theory Decision analysis;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
    2. van Asselt, Harro & Biermann, Frank, 2007. "European emissions trading and the international competitiveness of energy-intensive industries: a legal and political evaluation of possible supporting measures," Energy Policy, Elsevier, vol. 35(1), pages 497-506, January.
    3. Cason, Timothy N. & Gangadharan, Lata & Duke, Charlotte, 2003. "Market Power in Tradable Emission Markets: A Laboratory Testbed for Emission Trading in Port Phillip Bay, Victoria," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia 57841, Australian Agricultural and Resource Economics Society.
    4. Egenhofer, Christian, 2007. "The Making of the EU Emissions Trading Scheme:: Status, Prospects and Implications for Business," European Management Journal, Elsevier, vol. 25(6), pages 453-463, December.
    5. Bohringer, Christoph & Lange, Andreas, 2005. "On the design of optimal grandfathering schemes for emission allowances," European Economic Review, Elsevier, vol. 49(8), pages 2041-2055, November.
    6. Cathrine Hagem & Steffen Kallbekken & Ottar Mæstad & Hege Westskog, 2006. "Market Power with Interdependent Demand: Sale of Emission Permits and Natural Gas from Russia," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(2), pages 211-227, 06.
    7. Langniss, Ole & Praetorius, Barbara, 2006. "How much market do market-based instruments create? An analysis for the case of "white" certificates," Energy Policy, Elsevier, vol. 34(2), pages 200-211, January.
    8. Bode, Sven, 2006. "On multi-period emissions trading in the electricity sector," HWWA Discussion Papers 343, Hamburg Institute of International Economics (HWWA).
    9. Liao, Chao-ning & Önal, Hayri & Chen, Ming-Hsiang, 2009. "Average shadow price and equilibrium price: A case study of tradable pollution permit markets," European Journal of Operational Research, Elsevier, vol. 196(3), pages 1207-1213, August.
    10. Springer, Urs & Varilek, Matthew, 2004. "Estimating the price of tradable permits for greenhouse gas emissions in 2008-12," Energy Policy, Elsevier, vol. 32(5), pages 611-621, March.
    11. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers 1479, Iowa State University, Department of Economics.
    12. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    13. Schleich, Joachim & Ehrhart, Karl-Martin & Hoppe, Christian & Seifert, Stefan, 2006. "Banning banking in EU emissions trading?," Energy Policy, Elsevier, vol. 34(1), pages 112-120, January.
    14. Klepper, Gernot & Peterson, Sonja, 2006. "Marginal abatement cost curves in general equilibrium: The influence of world energy prices," Resource and Energy Economics, Elsevier, vol. 28(1), pages 1-23, January.
    15. Barreto, Leonardo & Kypreos, Socrates, 2004. "Emissions trading and technology deployment in an energy-systems "bottom-up" model with technology learning," European Journal of Operational Research, Elsevier, vol. 158(1), pages 243-261, October.
    16. Bode, Sven, 2006. "Multi-period emissions trading in the electricity sector--winners and losers," Energy Policy, Elsevier, vol. 34(6), pages 680-691, April.
    17. Gernot Klepper & Sonja Peterson, 2005. "Trading Hot-Air. The Influence of Permit Allocation Rules, Market Power and the US Withdrawal from the Kyoto Protocol," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(2), pages 205-228, October.
    18. Kara, M. & Syri, S. & Lehtila, A. & Helynen, S. & Kekkonen, V. & Ruska, M. & Forsstrom, J., 2008. "The impacts of EU CO2 emissions trading on electricity markets and electricity consumers in Finland," Energy Economics, Elsevier, vol. 30(2), pages 193-211, March.
    19. Cathrine Hagem & Hege Westskog, 2009. "Allocating Tradable Permits on the Basis of Market Price to Achieve Cost Effectiveness," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(2), pages 139-149, February.
    20. Carolyn Fischer & Richard D. Morgenstern, 2006. "Carbon Abatement Costs: Why the Wide Range of Estimates?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 73-86.
    21. Lund, Peter, 2007. "Impacts of EU carbon emission trade directive on energy-intensive industries -- Indicative micro-economic analyses," Ecological Economics, Elsevier, vol. 63(4), pages 799-806, September.
    22. Alan de Brauw, 2006. "The Kyoto Protocol, market power, and enforcement," Applied Economics, Taylor & Francis Journals, vol. 38(18), pages 2169-2178.
    23. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
    24. Rong, Aiying & Lahdelma, Risto, 2007. "CO2 emissions trading planning in combined heat and power production via multi-period stochastic optimization," European Journal of Operational Research, Elsevier, vol. 176(3), pages 1874-1895, February.
    25. Letmathe, Peter & Balakrishnan, Nagraj, 2005. "Environmental considerations on the optimal product mix," European Journal of Operational Research, Elsevier, vol. 167(2), pages 398-412, December.
    26. Lee, Cheng F. & Lin, Sue J. & Lewis, Charles, 2008. "Analysis of the impacts of combining carbon taxation and emission trading on different industry sectors," Energy Policy, Elsevier, vol. 36(2), pages 722-729, February.
    27. Dafna Eshel, 2005. "Optimal Allocation of Tradable Pollution Rights and Market Structures," Journal of Regulatory Economics, Springer, vol. 28(2), pages 205-223, 09.
    28. Georgopoulou, E. & Sarafidis, Y. & Mirasgedis, S. & Lalas, D.P., 2006. "Next allocation phase of the EU emissions trading scheme: How tough will the future be?," Energy Policy, Elsevier, vol. 34(18), pages 4002-4023, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Wu, Pei-Ing & Chen, Chai Tzu & Cheng, Pei-Ching & Liou, Je-Liang, 2014. "Climate game analyses for CO2 emission trading among various world organizations," Economic Modelling, Elsevier, vol. 36(C), pages 441-446.
    2. Wellington, John F. & Guiffrida, Alfred L. & Lewis, Stephen A., 2014. "Interior analysis of the green product mix solution," European Journal of Operational Research, Elsevier, vol. 237(3), pages 966-974.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:202:y:2010:i:1:p:248-254. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.