Emission Allowances

Does the spread between coal and gas prices affect the price of EU emissions allowances?

IAFA ConferenceNUI Galway, May 2012Peter Deeney

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*Whats an Emission Allowance?What Changes Price?Data Regression AnalysisConclusion

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*

Permission to emit one tonne of CO2.

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*

Permission to emit one tonne of CO2.

........How much should this cost?

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*European Emission Allowances - EUAs

Certified Emission Redutions - CERs.

Emission Reduction Units ERUs.

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*European Union Emission Allowances EUAs

Issued by EU ETS, soon to be auctioned rather than given out for free.

Quantity capped and agreed years in advance.

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*Certified Emission Reductions CERs

Issued by UN to non Annex countries so that CO2 reductions can be achieved in developing countries.

Problem with additionality.

Presently flooding market and dropping EUA prices.

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IAFA 2012 NUI Galway*Emission Reduction Unit ERU

Created in the Annex countries. Less worry about delivery.

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IAFA 2012 NUI Galway*

Cap puts a limit on the amount of GHG from regulated emitters in EU.

Trade allows free trading of these allowances so that emitters can reduce their own GHG emissions and sell their allowances, or not reduce their own and buy emission allowances from elsewhere.

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Scarcity

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Scarcity

(Perception of high activity or cheap fuel)

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Scarcity

Abundance

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Scarcity

Abundance (Perception of low activity or over allocation.)

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IAFA 2012 NUI Galway*Emission AllowancesChanges in Price LiteratureDataMethodsConclusion

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Chevallier, J. (2009) Carbon Futures and Macroeconomic Risk Factors: a view from the EU ETS

Fuel switching is more important for EUA prices than macro-economic variables.

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IAFA 2012 NUI Galway

Chevallier, J. (2011) A Model of Carbon Price Interactions with Macroeconomic and Energy Dynamics

Returns on carbon futures are influenced by equity dividend yields and junk bond premiums

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Delarue et al. (2008) Fuel Switching in the Electricity Sector under the EU ETS: Review and Prospective

Focuses on abatement in European electricity generation and finds that the spread between gas and coal and the load required are larger influences than EUA prices on the level of reduction of CO2.

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Increasing Gas Coal spread should decrease use of gas increase use of coal, increase GHG, Increase EUA price.

Increasing Stoxx should increase expected GHG and increase EUA price.

Increasing Brent should reduce oil used as fuel, reduce GHG output and reduce EUA.IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Increase Consumer Goods indicates increased use and purchase, hence increased GHG, increased EUAIAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Brent

Consumer

Spread

StoxxIAFA 2012 NUI Galway*

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IAFA 2012 NUI Galway*13th March 2010 to 14th March 2012

DataStream Brent Crude Futures, US$, Stoxx, NBP Gas, European Consumer Goods Price Index,

ICE 3Month Futures prices for AP12 coal Rotterdam. All prices were converted to Euro, futures were discounted at Euribor rate

IAFA 2012 NUI Galway

EUA are not physically needed,

Required in March by regulated emitters.

https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/10

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

The quoted marginal costs are in Delarue and Dhaesseleer (2007) in the International Journal of Energy Research, and state that the marginal cost of electricity using coal is 0.67 that of electricity using gas.

The two time series of coal and gas prices were adjusted to have the ratio of their means equal to 0.67.IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Check for spurious regression. The usual method is to avoid spurious regression is to check the first differences of the data. A more sophisticated method is to check for non-stationarity (ADF) and then check for co-integration (Johansen).

Multiple Comparison Problem a test with a significance of 5% will be wrong 5% of the time.IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

The p value is the probability of observing the data with the hypothesis that the time series is not stationary.IAFA 2012 NUI Galway*

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Two YearsEUA, non-stationaryp= 0.92ChEUA, stationaryp= 10-7

Brent,non-stationaryp=0.90ChBrent, stationaryp= 10-26

Stoxx,non-stationaryp= 0.53ChStoxx, stationaryp= 10-36

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IAFA 2012 NUI Galway

Two YearsConsumer,non-stationary p= 0.61ChConsumer, stationary p= 10-9

Spread, non-stationary p = 0.7777, ChSpread, stationary p= 10-15

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IAFA 2012 NUI Galway

The p value is the probability of observing the data with the hypothesis that there are the rank number of co-integrating vectors.

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IAFA 2012 NUI Galway

Two Year EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1).

Result: Inconclusive Rank 0p = 0.4270Rank 1 p = 0.9017Rank 2 p = 0.9580Rank 3 p = 0.9246Rank 4 p = 0.9909IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Two YearEUA = 5.54 *** - 0.000976 Brent *** - 0.00809 Consumer - 0.0143 Spread *+ 0.0715 Stoxx ***R2 = 69%

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IAFA 2012 NUI Galway

Brent

Consumer

Spread

StoxxIAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

There seems to be a two phase behaviour in EUA prices. Up to 16th June 2011 there is reasonably stable prices and after this there is a steady decline.IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

First PeriodEUA, non-stationaryp= 0.82ChEUA, stationaryp= 10-6

Brent,non-stationaryp= 0.90ChBrent, stationaryp= 10-5

Stoxx,non-stationaryp= 0.61ChStoxx, stationaryp= 10-31

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IAFA 2012 NUI Galway

First PeriodConsumer,non-stationary p= 0.93ChConsumer, stationary p= 10-7

Spread, non-stationary p = 0.77 ChSpread, stationary p= 10-8

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

First Period EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1).

Result: PositiveRank 0p = 0.011Rank 1 p = 0.252Rank 2 p = 0.540Rank 3 p = 0.512Rank 4 p = 0.130

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

First PeriodEUA = 16.35*** + 0.000827 Brent *** + 0.0228 Consumer*** - 0.0287 Spread *** - 0.0501 Stoxx *** R2 = 40%IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Brent

Consumer

Spread

StoxxIAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Second PeriodEUA, curious p= 0.025ChEUA, stationaryp= 10-25

Brent,non-stationaryp= 0.96ChBrent, stationaryp= 10-7

Stoxx,non-stationaryp= 0.49ChStoxx, stationaryp= 0.0069

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IAFA 2012 NUI Galway

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IAFA 2012 NUI Galway

Second PeriodConsumer,non-stationary p= 0.75ChConsumer, stationary p= 0.0001

Spread, non-stationary p = 0.63 ChSpread, stationary p= 10-12

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Second Period EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1).

Result: PositiveRank 0p = 0.066Rank 1 p = 0.228Rank 2 p = 0.401Rank 3 p = 0.541Rank 4 p = 0.882

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Second Period EUA = 19.34*** - 0.00218 Brent *** + 0.00592 Consumer - 0.0186 Spread ** + 0.0345 Stoxx * R2 = 70%

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IAFA 2012 NUI Galway

Brent

Consumer

Spread

StoxxIAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

The regime modelling displays co-integration

The affect of Brent crude, consumer prices and the Stoxx seem unclear

The affect of the spread Gas 0.67Coal is to decrease the EUA price. This is consistent across time periods. Results from Diff and Ch vvvvvvvvvvvvvvvvv

IAFA 2012 NUI Galway*

IAFA 2012 NUI Galway

Brent ?

Stoxx ?

Consumer ?

Spread

IAFA