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Emission Allowances. Does the spread between coal and gas prices affect the price of EU emissions allowances? IAFA Conference NUI Galway, May 2012 Peter Deeney. Contents. What’s an Emission Allowance? What Changes Price? Data Regression Analysis Conclusion. Emission Allowances. - PowerPoint PPT Presentation

Text of 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.

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*Emission Reduction Unit ERU

    Created in the Annex countries. Less worry about delivery.

    IAFA 2012 NUI Galway

  • 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.

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*

    Scarcity

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*

    Scarcity

    (Perception of high activity or cheap fuel)

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*

    Scarcity

    Abundance

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*

    Scarcity

    Abundance (Perception of low activity or over allocation.)

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*Emission AllowancesChanges in Price LiteratureDataMethodsConclusion

    IAFA 2012 NUI Galway

  • 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.

    IAFA 2012 NUI Galway*

    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*

    IAFA 2012 NUI Galway

  • 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*

    IAFA 2012 NUI Galway

  • 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

    IAFA 2012 NUI Galway*

    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

    IAFA 2012 NUI Galway*

    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.

    IAFA 2012 NUI Galway*

    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%

    IAFA 2012 NUI Galway*

    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

    IAFA 2012 NUI Galway*

    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

    IAFA 2012 NUI Galway*

    IAFA 2012 NUI Galway

  • IAFA 2012 NUI Galway*

    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%

    IAFA 2012 NUI Galway*

    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

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