ETS Alignment: a price collar proposal for carbon market integration

The global carbon market landscape is fragmented and increasingly complex. The conclusions reached at COP26 in Glasgow on the Article 6 rulebook are expected to achieve further mitigation using market mechanisms, facilitate the coordination of international efforts and increase carbon market integration. Three sets of conditions are necessary for smoothing the linking of emissions trading systems (ETSs). Before negotiations, mutual trust is crucial to respond to unexpected developments in partners’ economic, social and political circumstances. During the linking negotiations, a degree of alignment of core design features of ETSs is necessary to harmonise the systems. After the completion of negotiations, built-in reviews and broad-based consultations, as well as mechanisms for revision, dispute resolution and potential future delinking, are fundamental to ensure that linking works over time. The degree of alignment necessary for linking is a critical issue. Some ETS features (e.g., the price control mechanisms) require compatibility, whereas other key design elements (e.g., the stringency of the cap) may not require strict compatibility if they lead to comparable outcomes. Other ETS design features (e.g., the allocation phases and compliance periods) would benefit from coordination but do not need to be aligned. When ETSs are linked, the efficiency gains from allowance trade are enhanced compared to autarky (pre-link levels), as domestic and foreign allowance prices fully or partially (in case of linking with quotas) converge to an intermediate level. The price risk of linking could be constrained by enforcing a price collar (i.e., a price floor and a price ceiling) for the linked system. The price collar could be specified by the intersection between the two respective intervals representing acceptable post-link allowance prices. Options for enforcing the price ceiling include releasing allowances from a joint cost-containment reserve. To enforce the floor, allowances can be allocated in auctions with a reserve price equal to the floor. Alternatively, a ‘top-up’ carbon tax could be applied to allowances that are auctioned at a price below the floor. The price collar could help jurisdictions to mitigate systemic shocks that may affect allowance prices like recession, unanticipated growth, technological leaps that lower the abatement cost of emissions, as well as changes in companion climate policies. Reducing price risk and uncertainty would be beneficial for regulators, regulated entities and investors. However, reaching an agreement on the parameters and rules of a price collar in the linked system can be difficult. Early and open dialogue between the ETSs is strongly recommended to overcome these challenges

The impact of the EU emissions trading system on competitiveness and carbon leakage

Concerns about the potential negative effects on domestic firms’ international competitiveness and ensuing carbon leakage are the main obstacle to the unilateral use of carbon pricing for reducing greenhouse gas emissions. Since 2005, the EU Emissions Trading System (EU ETS) has put a price on about half of the EU’s overall emissions and presently remains the largest cap-and-trade scheme in the world. Monitoring the competitiveness effects of the EU ETS is vital for evaluating the cost effectiveness of the policy instrument and for amending it if needed. This paper surveys the econometric literature that tests for the occurrence of competitiveness effects and carbon leakage under the EU ETS. Emphasised is the specific or more general relevance of estimation results for sectors, countries and years. Organised in this way, the empirical evidence may better inform policy. The review also covers several studies analysing the competitiveness effects of the EU ETS through the lens of stock markets. By far, the most frequently encountered conclusion is that no evidence was found of negative statistically significant effects on firms’ competitiveness (nor, therefore, of carbon leakage). Among the few adverse effects, those concerning increased FDI activity in certain regulated sectors deserve special consideration

Key economic drivers enabling municipal renewable energy communities’ benefits in the Italian context

Community energy is a buzzword that has historically included various type of experiences. In 2018, the Renewable Energy Directive (RED II) legally defined renewable energy communities (RECs). Based on the first pilot projects and on the Italian legal framework, a possible REC configuration of municipal initiative with a high replicability potential is one in which a photovoltaic system is installed in educational buildings and shares energy with neighbouring residential consumers. This analysis presents an economical evaluation of different possible scenarios depending on variables such as solar radiation, system capacity, fraction of self-consumption within the REC, installation costs and energy prices. All the scenarios identified and analysed show positive economic indexes, although the energy and economic results may significantly vary depending on the variables studied. In the analysed case studies, the Net Present Value (after 20 years) is between kEUR 51 and kEUR 478; the internal rate of return is between 9.5% and 88%; the payback time is between 13.6 years and 1.1 years. The results of this analysis are relevant as they allow us to better understand the critical factors that can enable REC in providing local economic and social benefits to have a real impact on energy poverty or on the provision of local social services

Vehicle taxes as a climate policy instrument: econometric evidence from Spain

We study the local distortionary effects of notches in Spain’s CO2-based vehicle registration tax on the distribution of new car CO2 performance. These effects are the smoking gun of carmaker strategic behaviour and affect in turn tax revenue and CO2 emissions. Using model-level data on all car registrations in Spain 2010-2020, we apply the bunching approach to the three thresholds of the tax scheme: 120, 160, and 200 gCO2/km. We find that the tax notches strongly affected market outcomes, resulting in the sale of about 388,000 more cars (overall) at or just below the thresholds compared to the respective counterfactuals without the thresholds. This translates into about €335 million of foregone tax revenue and only very limited extra abatement of CO2 emissions. Over 90-95% of all estimated bunching took place at the first threshold (120 gCO2/km). Over 60% of all estimated bunching took place before 2015. Bunching diminished over time, which reflects diminished effectiveness of the tax in both reducing CO2 emissions and generating revenue. Taking the interactions with both EU vehicle emission standards and similar CO2-related policies in other Member States into consideration is important for interpreting these results

ETS alignment : a price collar proposal for carbon market integration

This report was prepared to inform the Carbon Market Policy Dialogue (CMPD) between the European Commission, as the regulator of the EU Emissions Trading System, and the regulatory authorities for the emissions trading systems (ETSs) of California, Quebec, China, New Zealand and Switzerland. Building on the earlier findings of the LIFE DICET project, this fifth and final report identifies specific ETS design elements requiring specific degrees of alignment/harmonisation and discusses how this can be achieved in linking negotiations. Moreover, with a view to finding ways to facilitate the establishment of direct linkages between ETSs, a proposal regarding the management of allowance prices in the form of a “price collar for the linked system” is presented

Linking emissions trading systems with different offset provisions

There is a very large cost-effectiveness potential for the implementation of offsets under Emissions Trading Schemes (ETSs). The scientific literature highlights that heterogeneity in offset provisions between prospective partners in an ETS linkage should be addressed for the sake of linking, but is not regarded as a priority.Co-benefits of offset projects are typically insufficiently incentivised, while adverse impacts have been reported on the local communities. In general, the experience with the Clean Development Mechanism (CDM) can greatly inform offset provisions design. Experts at the Carbon Market Policy Dialogue share insights on the most successful offset provisions. The Paris Agreement and its Article 6 can foster ETS linking, but requires additional coordination by prospective partners on key aspects

Linking emissions trading systems with different measures for carbon leakage prevention

Different measures for carbon leakage prevention across Emissions Trading Systems (ETSs) may distort economic competition between firms. The same is true of competition between jurisdictions if decisions on the location of production plants are concerned. Free allocation of emission allowances responds to a logic of carbon costs compensation. Border carbon adjustments aim at levelling the playing field between domestic firms and their foreign competitors. Direct support to low-carbon innovation aims at enhancing the competitiveness of domestic firms. Any instrument for carbon leakage prevention could produce, depending on its own specific design, competitive distortions that are illegitimate under WTO law or other applicable trade regime. By inducing convergence of allowance prices, ETS linking reduces any internal competitive distortion due to differences in carbon prices. However, given pre-link differences in anti-leakage measures, price convergence can highlight or even exacerbate potential competitive distortions. In a linking context, output-based allocation may amplify or attenuate competitive distortions by interacting with post-link changes in allowance prices. Differences in anti-leakage measures do not preclude linking in a technical sense. However, with time, some harmonization may prove necessary for the political sustainability of the linkage. The actual significance of any competitive distortion always depends on the extent to which firms compete in a market

Vehicle taxes as a climate policy instrument: econometric evidence from Spain

We study the local distortionary effects of notches in Spain’s CO2-based vehicle registration tax on the distribution of new car CO2 performance. These effects are the smoking gun of carmaker strategic behaviour and affect in turn tax revenue and CO2 emissions. Using model-level data on all car registrations in Spain 2010-2020, we apply the bunching approach to the three thresholds of the tax scheme: 120, 160, and 200 gCO2/km. We find that the tax notches strongly affected market outcomes, resulting in the sale of about 388,000 more cars (overall) at or just below the thresholds compared to the respective counterfactuals without the thresholds. This translates into about €335 million of foregone tax revenue and only very limited extra abatement of CO2 emissions. Over 90-95% of all estimated bunching took place at the first threshold (120 gCO2/km). Over 60% of all estimated bunching took place before 2015. Bunching diminished over time, which reflects diminished effectiveness of the tax in both reducing CO2 emissions and generating revenue. Taking the interactions with both EU vehicle emission standards and similar CO2-related policies in other Member States into consideration is important for interpreting these results

ETS alignment : a price collar proposal for carbon market integration

The global carbon market landscape is fragmented and increasingly complex. The conclusions reached at COP26 in Glasgow on the Article 6 rulebook are expected to achieve further mitigation using market mechanisms, facilitate the coordination of international efforts and increase carbon market integration. Three sets of conditions are necessary for smoothing the linking of emissions trading systems (ETSs). Before negotiations, mutual trust is crucial to respond to unexpected developments in partners’ economic, social and political circumstances. During the linking negotiations, a degree of alignment of core design features of ETSs is necessary to harmonise the systems. After the completion of negotiations, built-in reviews and broad-based consultations, as well as mechanisms for revision, dispute resolution and potential future delinking, are fundamental to ensure that linking works over time. The degree of alignment necessary for linking is a critical issue. Some ETS features (e.g., the price control mechanisms) require compatibility, whereas other key design elements (e.g., the stringency of the cap) may not require strict compatibility if they lead to comparable outcomes. Other ETS design features (e.g., the allocation phases and compliance periods) would benefit from coordination but do not need to be aligned. When ETSs are linked, the efficiency gains from allowance trade are enhanced compared to autarky (pre-link levels), as domestic and foreign allowance prices fully or partially (in case of linking with quotas) converge to an intermediate level. The price risk of linking could be constrained by enforcing a price collar (i.e., a price floor and a price ceiling) for the linked system. The price collar could be specified by the intersection between the two respective intervals representing acceptable post-link allowance prices. Options for enforcing the price ceiling include releasing allowances from a joint cost-containment reserve. To enforce the floor, allowances can be allocated in auctions with a reserve price equal to the floor. Alternatively, a ‘top-up’ carbon tax could be applied to allowances that are auctioned at a price below the floor. The price collar could help jurisdictions to mitigate systemic shocks that may affect allowance prices like recession, unanticipated growth, technological leaps that lower the abatement cost of emissions, as well as changes in companion climate policies. Reducing price risk and uncertainty would be beneficial for regulators, regulated entities and investors. However, reaching an agreement on the parameters and rules of a price collar in the linked system can be difficult. Early and open dialogue between the ETSs is strongly recommended to overcome these challenges

Discriminating neutrino mass models using Type II seesaw formula

In this paper we propose a kind of natural selection which can discriminate the three possible neutrino mass models, namely the degenerate, inverted hierarchical and normal hierarchical models, using the framework of Type II seesaw formula. We arrive at a conclusion that the inverted hierarchical model appears to be most favourable whereas the normal hierarchical model follows next to it. The degenerate model is found to be most unfavourable. We use the hypothesis that those neutrino mass models in which Type I seesaw term dominates over the Type II left-handed Higgs triplet term are favoured to survive in nature.Comment: No change in the results, a few references added, some changes in Type[IIB] calculation