IDEAS home Printed from https://ideas.repec.org/a/kap/enreec/v74y2019i2d10.1007_s10640-019-00346-7.html
   My bibliography  Save this article

Linking with Uncertainty: The Relationship Between EU ETS Pollution Permits and Kyoto Offsets

Author

Listed:
  • Beat Hintermann

    (University of Basel)

  • Marc Gronwald

    (University of Aberdeen Business School)

Abstract

Carbon offsets from the Kyoto Flexible Mechanisms can be used by firms in the EU Emissions Trading Scheme for compliance in lieu of EU allowances, making these carbon assets interchangeable. We offer an explanation of the price spread using a structural model of the price for Certified Emissions Reductions that combines three features: a limit for the use of Kyoto offsets within the EU ETS; a disconnect between the current price of offsets and their marginal cost of production for institutional reasons; and uncertainty about future supply and demand of offsets. Our model expresses the offset price as an average of the EU allowance price and an offset’s outside value, weighted by the probability of a binding import limit. Using a monthly series of the United Nation’s Clean Development Mechanism and Joint Implementation about offset supply and demand, we provide empirical support for our theory of offset price formation. Counterfactual simulations suggest that the price process is dominated by uncertainty.

Suggested Citation

  • Beat Hintermann & Marc Gronwald, 2019. "Linking with Uncertainty: The Relationship Between EU ETS Pollution Permits and Kyoto Offsets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(2), pages 761-784, October.
  • Handle: RePEc:kap:enreec:v:74:y:2019:i:2:d:10.1007_s10640-019-00346-7
    DOI: 10.1007/s10640-019-00346-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10640-019-00346-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s10640-019-00346-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    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. Alexander Vasa, 2012. "Certified emissions reductions and CDM limits: revenue and distributional aspects," Climate Policy, Taylor & Francis Journals, vol. 12(6), pages 645-666, November.
    2. Nazifi, Fatemeh, 2013. "Modelling the price spread between EUA and CER carbon prices," Energy Policy, Elsevier, vol. 56(C), pages 434-445.
    3. repec:dau:papers:123456789/11687 is not listed on IDEAS
    4. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    5. repec:dau:papers:123456789/4612 is not listed on IDEAS
    6. Kanamura, Takashi, 2016. "Role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets," Energy Economics, Elsevier, vol. 54(C), pages 204-212.
    7. Hintermann, Beat, 2012. "Pricing emission permits in the absence of abatement," Energy Economics, Elsevier, vol. 34(5), pages 1329-1340.
    8. Beat Hintermann & Sonja Peterson & Wilfried Rickels, 2016. "Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 108-128.
    9. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    10. Mizrach, Bruce, 2012. "Integration of the global carbon markets," Energy Economics, Elsevier, vol. 34(1), pages 335-349.
    11. Mansanet-Bataller, Maria & Chevallier, Julien & Hervé-Mignucci, Morgan & Alberola, Emilie, 2011. "EUA and sCER phase II price drivers: Unveiling the reasons for the existence of the EUA-sCER spread," Energy Policy, Elsevier, vol. 39(3), pages 1056-1069, March.
    12. Koop, Gary & Tole, Lise, 2013. "Modeling the relationship between European carbon permits and certified emission reductions," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 166-181.
    13. Marc Chesney & Luca Taschini, 2012. "The Endogenous Price Dynamics of Emission Allowances and an Application to CO 2 Option Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(5), pages 447-475, November.
    14. Georg Grull & Luca Taschini, 2012. "Linking Emission Trading Schemes: A Short Note," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 3).
    15. repec:dau:papers:123456789/7938 is not listed on IDEAS
    16. Gronwald, Marc & Hintermann, Beat (ed.), 2015. "Emissions Trading as a Policy Instrument: Evaluation and Prospects," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262029286, December.
    17. Julien Chevallier, 2012. "EUAs and CERs: Interactions in a Markov regime-switching environment," Economics Bulletin, AccessEcon, vol. 32(1), pages 86-101.
    18. repec:dau:papers:123456789/5109 is not listed on IDEAS
    19. Raphael Trotignon, 2012. "Combining cap-and-trade with offsets: lessons from the EU-ETS," Climate Policy, Taylor & Francis Journals, vol. 12(3), pages 273-287, May.
    20. Hieronymi, Philipp & Schüller, David, 2015. "The Clean-Development Mechanism, stochastic permit prices and energy investments," Energy Economics, Elsevier, vol. 47(C), pages 25-36.
    21. Rahman, Shaikh M. & Kirkman, Grant A., 2015. "Costs of certified emission reductions under the Clean Development Mechanism of the Kyoto Protocol," Energy Economics, Elsevier, vol. 47(C), pages 129-141.
    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. Gavard, Claire & Kirat, Djamel, 2020. "Short-term impacts of carbon offsetting on emissions trading schemes: Empirical insights from the EU experience," ZEW Discussion Papers 20-058, ZEW - Leibniz Centre for European Economic Research.
    2. Yoomi Kim & Katsuya Tanaka & Shunji Matsuoka, 2020. "Environmental and economic effectiveness of the Kyoto Protocol," PLOS ONE, Public Library of Science, vol. 15(7), pages 1-15, July.
    3. Djamel KIRAT & Claire GAVARD, 2020. "Short-term impacts of carbon offsetting on emissions trading schemes: empirical insights from the EU experience," LEO Working Papers / DR LEO 2821, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    4. Hintermann, Beat & Zarkovic, Maja, 2020. "A carbon horse race: Abatement subsidies vs. permit trading in Switzerland," Working papers 2020/05, Faculty of Business and Economics - University of Basel.
    5. Rickels, Wilfried & Proelß, Alexander & Geden, Oliver & Burhenne, Julian & Fridahl, Mathias, 2020. "The future of (negative) emissions trading in the European Union," Kiel Working Papers 2164, Kiel Institute for the World Economy (IfW Kiel).
    6. Stefano F. Verde & Simone Borghesi, 2022. "The International Dimension of the EU Emissions Trading System: Bringing the Pieces Together," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 23-46, September.

    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. Marc Gronwald & Beat Hintermann, 2016. "Explaining the EUA-CER Spread," CESifo Working Paper Series 5795, CESifo.
    2. 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).
    3. Kapoor, Nimisha & Ghosh, Sajal, 2014. "Long-term association between European and Indian markets on carbon credit price," Renewable and Sustainable Energy Reviews, Elsevier, vol. 38(C), pages 656-662.
    4. Gavard, Claire & Kirat, Djamel, 2018. "Flexibility in the market for international carbon credits and price dynamics difference with European allowances," Energy Economics, Elsevier, vol. 76(C), pages 504-518.
    5. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
    6. Federico Galán-Valdivieso & Elena Villar-Rubio & María-Dolores Huete-Morales, 2018. "The erratic behaviour of the EU ETS on the path towards consolidation and price stability," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 18(5), pages 689-706, October.
    7. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    8. Simon Quemin & Christian Perthuis, 2019. "Transitional Restricted Linkage Between Emissions Trading Schemes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 1-32, September.
    9. Kanamura, Takashi, 2016. "Role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets," Energy Economics, Elsevier, vol. 54(C), pages 204-212.
    10. Yue-Jun Zhang, 2016. "Research on carbon emission trading mechanisms: current status and future possibilities," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 39(1/2), pages 89-107.
    11. Beat Hintermann, 2017. "Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(1), pages 89-112, January.
    12. Medina, Vicente & Pardo, Ángel & Pascual, Roberto, 2014. "The timeline of trading frictions in the European carbon market," Energy Economics, Elsevier, vol. 42(C), pages 378-394.
    13. 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.
    14. Naegele, Helene, 2018. "Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 70(1), pages 77-106.
    15. Helene Naegele, 2018. "Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 70(1), pages 77-106, May.
    16. Vicente Medina & Angel Pardo & Roberto Pascual, 2013. "Carbon Credits: Who is the Leader of the Pack?," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 210-220.
    17. Eric Ghysels & J. Isaac Miller, 2014. "On the Size Distortion from Linearly Interpolating Low-frequency Series for Cointegration Tests," Advances in Econometrics, in: Essays in Honor of Peter C. B. Phillips, volume 14, pages 93-122, Emerald Group Publishing Limited.
    18. Panagiotis Petris & George Dotsis & Panayotis Alexakis, 2022. "Bubble tests in the London housing market: A borough level analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1044-1063, January.
    19. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    20. Zhang, Yue-Jun & Sun, Ya-Fang & Huang, Junling, 2018. "Energy efficiency, carbon emission performance, and technology gaps: Evidence from CDM project investment," Energy Policy, Elsevier, vol. 115(C), pages 119-130.

    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:kap:enreec:v:74:y:2019:i:2:d:10.1007_s10640-019-00346-7. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.