IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v202y2010i1p248-254.html
   My bibliography  Save this article

The emissions trading paradox

Author

Listed:
  • Jaehn, Florian
  • Letmathe, Peter

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.

Suggested Citation

  • Jaehn, Florian & Letmathe, Peter, 2010. "The emissions trading paradox," European Journal of Operational Research, Elsevier, vol. 202(1), pages 248-254, April.
    • Handle: RePEc:eee:ejores:v:202:y:2010:i:1:p:248-254
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377-2217(09)00317-8
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. repec:dau:papers:123456789/4222 is not listed on IDEAS
    3. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    4. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    5. 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, Springer;European Association of Environmental and Resource Economists, vol. 32(2), pages 205-228, October.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Bode, Sven, 2006. "On multi-period emissions trading in the electricity sector," HWWA Discussion Papers 343, Hamburg Institute of International Economics (HWWA).
    11. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    12. 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.
    13. 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," Ecological Economics, Elsevier, vol. 46(3), pages 469-491, October.
    14. 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.
    15. 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.
    16. 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, Springer;European Association of Environmental and Resource Economists, vol. 34(2), pages 211-227, June.
    17. A. C. Christiansen & A. Arvanitakis & K. Tangen & H. Hasselknippe, 2005. "Price determinants in the EU emissions trading scheme," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 15-30, January.
    18. 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.
    19. 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.
    20. 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.
    21. 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.
    22. 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.
    23. 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.
    24. Alan de Brauw, 2006. "The Kyoto Protocol, market power, and enforcement," Applied Economics, Taylor & Francis Journals, vol. 38(18), pages 2169-2178.
    25. Bunn, Derek W. & Fezzi, Carlo, 2007. "Interaction of European Carbon Trading and Energy Prices," Climate Change Modelling and Policy Working Papers 9092, Fondazione Eni Enrico Mattei (FEEM).
    26. Kunsch, P. L. & Springael, J. & Brans, J. -P., 2004. "The zero-emission certificates: A novel CO2-pollution reduction instrument applied to the electricity market," European Journal of Operational Research, Elsevier, vol. 153(2), pages 386-399, March.
    27. Derek W. Bunn & Carlo Fezzi, 2007. "Interaction of European Carbon Trading and Energy Prices," Working Papers 2007.63, Fondazione Eni Enrico Mattei.
    28. Cathrine Hagem & Hege Westskog, 2009. "Allocating Tradable Permits on the Basis of Market Price to Achieve Cost Effectiveness," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 42(2), pages 139-149, February.
    29. 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.
    30. 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.
    31. Bode, Sven, 2006. "Multi-period emissions trading in the electricity sector--winners and losers," Energy Policy, Elsevier, vol. 34(6), pages 680-691, April.
    32. 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.
    33. 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.
    34. Dafna Eshel, 2005. "Optimal Allocation of Tradable Pollution Rights and Market Structures," Journal of Regulatory Economics, Springer, vol. 28(2), pages 205-223, September.
    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


    Cited by:

    1. Difs, Kristina, 2010. "National energy policies: Obstructing the reduction of global CO2 emissions? An analysis of Swedish energy policies for the district heating sector," Energy Policy, Elsevier, vol. 38(12), pages 7775-7782, December.
    2. Sabzevar, Nikoo & Enns, S.T. & Bergerson, Joule & Kettunen, Janne, 2017. "Modeling competitive firms' performance under price-sensitive demand and cap-and-trade emissions constraints," International Journal of Production Economics, Elsevier, vol. 184(C), pages 193-209.
    3. Simon Cadez & Albert Czerny, 2010. "Carbon management strategies in manufacturing companies: An exploratory note," Journal of East European Management Studies, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 15(4), pages 348-360.
    4. Fan, Jin & Wang, Shanyong & Wu, Yanrui & Li, Jun & Zhao, Dingtao, 2015. "Buffer effect and price effect of a personal carbon trading scheme," Energy, Elsevier, vol. 82(C), pages 601-610.
    5. Falbo, Paolo & Felletti, Daniele & Stefani, Silvana, 2013. "Free EUAs and fuel switching," Energy Economics, Elsevier, vol. 35(C), pages 14-21.
    6. Liu, Guangrui & Yan, Beibei & Chen, Guanyi, 2013. "Technical review on jet fuel production," Renewable and Sustainable Energy Reviews, Elsevier, vol. 25(C), pages 59-70.
    7. 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.
    8. Lee, Kangil & Han, Taek-Whan, 2016. "How vulnerable is the emissions market to transaction costs?: An ABMS Approach," Energy Policy, Elsevier, vol. 90(C), pages 273-286.
    9. Tang, Ling & Shi, Jiarui & Bao, Qin, 2016. "Designing an emissions trading scheme for China with a dynamic computable general equilibrium model," Energy Policy, Elsevier, vol. 97(C), pages 507-520.
    10. Andreas Welling, 2017. "Green Finance: Recent developments, characteristics and important actors," FEMM Working Papers 170002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    11. Franco, Carlos J. & Castaneda, Monica & Dyner, Isaac, 2015. "Simulating the new British Electricity-Market Reform," European Journal of Operational Research, Elsevier, vol. 245(1), pages 273-285.
    12. Dai, Hancheng & Xie, Yang & Liu, Jingyu & Masui, Toshihiko, 2018. "Aligning renewable energy targets with carbon emissions trading to achieve China's INDCs: A general equilibrium assessment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 82(P3), pages 4121-4131.
    13. Konur, Dinçer, 2017. "Non-collaborative emission targets joining and quantity flow decisions in a Stackelberg setting," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 105(C), pages 60-82.
    14. Heinz Klingelhöfer & Peter Kurz, 2011. "Financial valuation of investments in future power generation technologies: nuclear fusion and CCS in an emissions trading system," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 19(4), pages 415-438, December.
    15. 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.
    16. Simon Cadez & Albert Czerny & Peter Letmathe, 2019. "Stakeholder pressures and corporate climate change mitigation strategies," Business Strategy and the Environment, Wiley Blackwell, vol. 28(1), pages 1-14, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
    2. Zhang, Yue-Jun & Wei, Yi-Ming, 2010. "An overview of current research on EU ETS: Evidence from its operating mechanism and economic effect," Applied Energy, Elsevier, vol. 87(6), pages 1804-1814, June.
    3. Balietti, Anca Claudia, 2016. "Trader types and volatility of emission allowance prices. Evidence from EU ETS Phase I," Energy Policy, Elsevier, vol. 98(C), pages 607-620.
    4. Amélie Charles & Olivier Darné & Jessica Fouilloux, 2010. "Testing the Martingale Difference Hypothesis in the EU ETS Markets for the CO2 Emission Allowances: Evidence from Phase I and Phase II," Post-Print hal-00797491, HAL.
    5. Longfei He & Chenglin Hu & Daozhi Zhao & Haili Lu & Xiaoxi Fu & Yiyu Li, 2016. "Carbon emission mitigation through regulatory policies and operations adaptation in supply chains: theoretic developments and extensions," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 84(1), pages 179-207, November.
    6. Marc Gronwald & Janina Ketterer & Stefan Trück, 2011. "The Dependence Structure between Carbon Emission Allowances and Financial Markets - A Copula Analysis," CESifo Working Paper Series 3418, CESifo.
    7. Hintermann, Beat & Peterson, Sonja & Rickels, Wilfried, 2014. "Price and market behavior in Phase II of the EU ETS," Kiel Working Papers 1962, Kiel Institute for the World Economy (IfW Kiel).
    8. Julien Chevallier, 2013. "Carbon trading: past, present and future," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 21, pages 471-489, Edward Elgar Publishing.
    9. Baochen Yang & Chuanze Liu & Zehao Gou & Jiacheng Man & Yunpeng Su, 2018. "How Will Policies of China’s CO 2 ETS Affect its Carbon Price: Evidence from Chinese Pilot Regions," Sustainability, MDPI, vol. 10(3), pages 1-26, February.
    10. Veith, Stefan & Werner, Jörg R. & Zimmermann, Jochen, 2009. "Capital market response to emission rights returns: Evidence from the European power sector," Energy Economics, Elsevier, vol. 31(4), pages 605-613, July.
    11. Liu, Beibei & He, Pan & Zhang, Bing & Bi, Jun, 2012. "Impacts of alternative allowance allocation methods under a cap-and-trade program in power sector," Energy Policy, Elsevier, vol. 47(C), pages 405-415.
    12. Anke, Carl-Philipp & Hobbie, Hannes & Schreiber, Steffi & Möst, Dominik, 2020. "Coal phase-outs and carbon prices: Interactions between EU emission trading and national carbon mitigation policies," Energy Policy, Elsevier, vol. 144(C).
    13. Chang-Yi Li & Son-Nan Chen & Shih-Kuei Lin, 2016. "Pricing derivatives with modeling CO emission allowance using a regime-switching jump diffusion model: with regime-switching risk premium," The European Journal of Finance, Taylor & Francis Journals, vol. 22(10), pages 887-908, August.
    14. Julien Chevallier & Benoît Sévi, 2011. "On the realized volatility of the ECX CO 2 emissions 2008 futures contract: distribution, dynamics and forecasting," Annals of Finance, Springer, vol. 7(1), pages 1-29, February.
    15. Letmathe, Peter & Wagner, Sandra, 2018. "“Messy” marginal costs: Internal pricing of environmental aspects on the firm level," International Journal of Production Economics, Elsevier, vol. 201(C), pages 41-52.
    16. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2009. "Options Introduction and Volatility in the EU ETS," Working Papers halshs-00405709, HAL.
    17. Rachid Boutti & El Amri Adil & Florence Rodhain, 2019. "Multivariate Analysis of a Time Series EU ETS: Methods and Applications in Carbon Finance," Post-Print hal-03676358, HAL.
    18. Charles, Amélie & Darné, Olivier & Fouilloux, Jessica, 2011. "Testing the martingale difference hypothesis in CO2 emission allowances," Economic Modelling, Elsevier, vol. 28(1-2), pages 27-35, January.
    19. Daskalakis, George & Markellos, Raphael N., 2009. "Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext," Energy Policy, Elsevier, vol. 37(7), pages 2594-2604, July.
    20. Adil El Amri & Rachid Boutti & Salah Oulfarsi & Florence Rodhain & Brahim Bouzahir, 2020. "Carbon financial markets underlying climate risk management, pricing and forecasting: Fundamental analysis," Post-Print hal-03120782, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.