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Emission Allowances

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.

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Emission Allowances

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  1. 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

  2. Contents What’s an Emission Allowance? What Changes Price? Data Regression Analysis Conclusion IAFA 2012 NUI Galway

  3. Emission Allowances Permission to emit one tonne of CO2. IAFA 2012 NUI Galway

  4. Emission Allowances Permission to emit one tonne of CO2. ........How much should this cost? IAFA 2012 NUI Galway

  5. Emission Allowances European Emission Allowances - EUAs Certified Emission Redutions - CERs. Emission Reduction Units – ERUs. IAFA 2012 NUI Galway

  6. Emission Allowances 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

  7. Emission Allowances 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

  8. Emission Allowances Emission Reduction Unit ERU Created in the Annex countries. Less worry about delivery. IAFA 2012 NUI Galway

  9. Emission Allowances 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

  10. What changes the price? Scarcity IAFA 2012 NUI Galway

  11. What changes the price? Scarcity (Perception of high activity or cheap fuel) IAFA 2012 NUI Galway

  12. What changes the price? Scarcity Abundance IAFA 2012 NUI Galway

  13. What changes the price? Scarcity Abundance (Perception of low activity or over allocation.) IAFA 2012 NUI Galway

  14. Contents Emission Allowances Changes in Price Literature Data Methods Conclusion IAFA 2012 NUI Galway

  15. Literature 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

  16. Literature 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

  17. Literature 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

  18. Hypotheses • 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

  19. Hypotheses • Increase Consumer Goods indicates increased use and purchase, hence increased GHG, increased EUA IAFA 2012 NUI Galway

  20. Hypotheses • Brent • Consumer • Spread • Stoxx IAFA 2012 NUI Galway

  21. Data 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

  22. Data • EUA are not physically needed, • Required in March by regulated emitters.

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

  24. Data IAFA 2012 NUI Galway

  25. Gas – (0.67) Coal Spread • The quoted marginal costs are in Delarue and D’haesseleer (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

  26. Analysis • 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

  27. Augmented Dickey Fuller • The p value is the probability of observing the data with the hypothesis that the time series is not stationary. IAFA 2012 NUI Galway

  28. Augmented Dickey Fuller • Two Years • EUA, non-stationary p= 0.92 • ChEUA, stationary p= 10-7 • Brent, non-stationary p=0.90 • ChBrent, stationary p= 10-26 • Stoxx, non-stationary p= 0.53 • ChStoxx, stationary p= 10-36 IAFA 2012 NUI Galway

  29. Augmented Dickey Fuller • Two Years • Consumer, non-stationary p= 0.61 • ChConsumer, stationary p= 10-9 • Spread, non-stationary p = 0.7777, ChSpread, stationary p= 10-15 IAFA 2012 NUI Galway

  30. Johansen Co-integration Test • 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

  31. Johansen Co-integration Test • Two Year EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1). • Result: Inconclusive • Rank 0 p = 0.4270 • Rank 1 p = 0.9017 • Rank 2 p = 0.9580 • Rank 3 p = 0.9246 • Rank 4 p = 0.9909 IAFA 2012 NUI Galway

  32. Johansen Co-integration Test EUA, Consumer, Stoxx and Spread (Brent) • Result: Positive • Rank 0 p = 0.075 • Rank 1 p = 0.560 • Rank 2 p = 0.919 • Rank 3 p = 0.828 IAFA 2012 NUI Galway

  33. Regression Analysis • Two Year • EUA = 5.54 *** - 0.000976 Brent *** • - 0.00809 Consumer - 0.0143 Spread * + 0.0715 Stoxx *** • R2 = 69% IAFA 2012 NUI Galway

  34. Hypotheses • Brent • Consumer • Spread • Stoxx IAFA 2012 NUI Galway

  35. Regime Modelling IAFA 2012 NUI Galway

  36. Regime Modelling • 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

  37. Regime ADF • First Period • EUA, non-stationary p= 0.82 • ChEUA, stationary p= 10-6 • Brent, non-stationary p= 0.90 • ChBrent, stationary p= 10-5 • Stoxx, non-stationary p= 0.61 • ChStoxx, stationary p= 10-31 IAFA 2012 NUI Galway

  38. Regime ADF • First Period • Consumer, non-stationary p= 0.93 • ChConsumer, stationary p= 10-7 • Spread, non-stationary p = 0.77 ChSpread, stationary p= 10-8 IAFA 2012 NUI Galway

  39. Regime Johansen • First Period EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1). • Result: Positive • Rank 0 p = 0.011 • Rank 1 p = 0.252 • Rank 2 p = 0.540 • Rank 3 p = 0.512 • Rank 4 p = 0.130 IAFA 2012 NUI Galway

  40. Regime OLS Modelling • First Period • EUA = 16.35*** + 0.000827 Brent *** • + 0.0228 Consumer*** - 0.0287 Spread *** - 0.0501 Stoxx *** • R2 = 40% IAFA 2012 NUI Galway

  41. Hypotheses • Brent • Consumer • Spread • Stoxx IAFA 2012 NUI Galway

  42. Regime ADF • Second Period • EUA, curious p= 0.025 • ChEUA, stationary p= 10-25 • Brent, non-stationary p= 0.96 • ChBrent, stationary p= 10-7 • Stoxx, non-stationary p= 0.49 • ChStoxx, stationary p= 0.0069 IAFA 2012 NUI Galway

  43. Regime EUA Second Period IAFA 2012 NUI Galway

  44. Regime ADF • Second Period • Consumer, non-stationary p= 0.75 • ChConsumer, stationary p= 0.0001 • Spread, non-stationary p = 0.63 ChSpread, stationary p= 10-12 IAFA 2012 NUI Galway

  45. Regime Johansen • Second Period EUA, Brent, Consumer, Stoxx and Spread for co-integration as they are all I(1). • Result: Positive • Rank 0 p = 0.066 • Rank 1 p = 0.228 • Rank 2 p = 0.401 • Rank 3 p = 0.541 • Rank 4 p = 0.882 IAFA 2012 NUI Galway

  46. Regime OLS Modelling • Second Period • EUA = 19.34*** - 0.00218 Brent *** • + 0.00592 Consumer - 0.0186 Spread ** + 0.0345 Stoxx * • R2 = 70% IAFA 2012 NUI Galway

  47. Hypotheses • Brent • Consumer • Spread • Stoxx IAFA 2012 NUI Galway

  48. Conclusions • 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

  49. Conclusions • Brent ? • Stoxx ? • Consumer ? • Spread IAFA 2012 NUI Galway

  50. Next .... Residuals against Date should not show an interesting pattern.... IAFA 2012 NUI Galway

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