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Banking of Surplus Emissions Allowances: Does the Volume Matter?

Author Info

Listed author(s):
  • Karsten Neuhoff
  • Anne Schopp
  • Rodney Boyd
  • Kateryna Stelmakh
  • Alexander Vasa

Abstract

In the European Emission Trading scheme the supply of allowances exceeds emissions - cumulating, according to our estimates, in a surplus of 2.7 billion tonnes by 2013/2014. We find that initially the surplus was acquired by power companies so as to hedge future carbon costs. As the surplus exceeds this hedging demand, additional allowances need to be acquired as speculative investment. This requires higher rates of return and implies that expected future carbon prices are highly discounted. This could explain the recent drop in carbon prices. The analysis shows that the volume of unused allowances matters for the discount applied to future carbon prices. We use our supply-demand framework to assess currently discussed policy options set-aside, reserve price for auctions and adjustments of emission targets.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.394484.de/dp1196.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1196.

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Length: 21 p.
Date of creation: 2012
Handle: RePEc:diw:diwwpp:dp1196
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Keywords: European emission trading scheme; banking; discount rates;

Find related papers by JEL classification:

  • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
  • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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  1. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
  2. Daniel Phaneuf & Till Requate, 2002. "Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 369-390, July.
  3. Changyun Wang, 2001. "Investor Sentiment and Return Predictability in Agricultural Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(10), pages 929-952, October.
  4. Bosetti, Valentina & Carraro, Carlo & Massetti, Emanuele, 2009. "Banking permits: Economic efficiency and distributional effects," Journal of Policy Modeling, Elsevier, vol. 31(3), pages 382-403, May.
  5. R. Trotignon & A. Denny Ellerman, 2008. "Compliance Behavior in THE EU-ETS: Cross Border Trading, Banking and Borrowing," Working Papers 0812, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-667.
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Cited by:

  1. Pablo Pintos & Pedro Linares, 2016. "Assessing the EU ETS with an Integrated Model," Working Papers 01-2016, Economics for Energy.
  2. Holt, Charles A. & Shobe, William M., 2016. "Reprint of: Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 69-86.
  3. William Acworth, 2014. "Can the Market Stability Reserve Stabilise the EU ETS: Commentators Hedge Their Bets," DIW Roundup: Politik im Fokus 23, DIW Berlin, German Institute for Economic Research.
  4. Creutzig, Felix & Goldschmidt, Jan Christoph & Lehmann, Paul & Schmid, Eva & von Blücher, Felix & Breyer, Christian & Fernandez, Blanca & Jakob, Michael & Knopf, Brigitte & Lohrey, Steffen & Susca, Ti, 2014. "Catching two European birds with one renewable stone: Mitigating climate change and Eurozone crisis by an energy transition," Renewable and Sustainable Energy Reviews, Elsevier, vol. 38(C), pages 1015-1028.
  5. Koch, Nicolas & Fuss, Sabine & Grosjean, Godefroy & Edenhofer, Ottmar, 2014. "Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything?—New evidence," Energy Policy, Elsevier, vol. 73(C), pages 676-685.
  6. Lucia, Julio J. & Mansanet-Bataller, Maria & Pardo, Ángel, 2015. "Speculative and hedging activities in the European carbon market," Energy Policy, Elsevier, vol. 82(C), pages 342-351.
  7. Hu, Jing & Crijns-Graus, Wina & Lam, Long & Gilbert, Alyssa, 2015. "Ex-ante evaluation of EU ETS during 2013–2030: EU-internal abatement," Energy Policy, Elsevier, vol. 77(C), pages 152-163.
  8. Cummins, Mark & Garry, Oonagh & Kearney, Claire, 2014. "Price discovery analysis of green equity indices using robust asymmetric vector autoregression," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 261-267.
  9. Richstein, Jörn C. & Chappin, Émile J.L. & de Vries, Laurens J., 2015. "The market (in-)stability reserve for EU carbon emission trading: Why it might fail and how to improve it," Utilities Policy, Elsevier, vol. 35(C), pages 1-18.
  10. Rannou, Yves, 2017. "Liquidity, information, strategic trading in an electronic order book: New insights from the European carbon markets," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 779-808.
  11. Richstein, Jörn C. & Chappin, Émile J.L. & de Vries, Laurens J., 2015. "Adjusting the CO2 cap to subsidised RES generation: Can CO2 prices be decoupled from renewable policy?," Applied Energy, Elsevier, vol. 156(C), pages 693-702.

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