Modelling Emission Allowance Prices

159 Pages·2017·4.94 MB·English

Dissertation
Modelling Emission Allowance
Prices
Wen, Ya
born in Beijing
Faculty of Economics and Business Administration
University of Duisburg-Essen
A thesis submitted for the degree of
doctor rerum politicarum (Dr. rer. pol.)
April 2017
1. Supervisor: Prof. Dr. Ru¨diger Kiesel
2. Supervisor: Prof. Dr. Christoph Weber
Day of the defense: 26.06.2017
ii
Acknowledgements
First and foremost I would like to express my special appreciation
and thanks to my supervisor Prof. Dr. Ru¨diger Kiesel for offer-
ing me the opportunity to complete this thesis and for his continu-
ous support of my Ph.D study and related research in the chair of
Energy Trading and Finance at the University of Duisburg-Essen. I
am very grateful for his patience, motivation, enthusiasm, and im-
mense knowledge, which make him a great mentor.
Moreover, I would like to thank Prof. Dr. Christoph Weber for
being my co-examiner.
I also thank my colleagues in the chair for a positive working atmo-
sphere. And finally, thanks to my family for supporting me spiri-
tually throughout writing this thesis.
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Contents
List of Figures vii
List of Tables ix
Abbreviation xi
1 Introduction 1
1.1 Background of Climate Change and Emission Trading . . . . . . 1
1.2 Motivation of the Thesis . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Contribution and Structure of the Thesis . . . . . . . . . . . . . 6
2 Regulatory Framework 9
2.1 International Agreement on Climate Change . . . . . . . . . . . . 9
2.1.1 UNFCCC and IPCC . . . . . . . . . . . . . . . . . . . . . 9
2.1.2 History of COP and its achievements . . . . . . . . . . . . 11
2.2 Kyoto Protocol . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2.1 Essential background . . . . . . . . . . . . . . . . . . . . . 16
2.2.2 Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2.3 Target of Kyoto Protocol . . . . . . . . . . . . . . . . . . 20
2.2.4 Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.2.5 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.2.6 Ratification of Kyoto Protocol . . . . . . . . . . . . . . . 31
2.2.7 Doha Amendment and second commitment period . . . . 33
2.3 COP 21 and Paris Agreement . . . . . . . . . . . . . . . . . . . . 36
2.3.1 Aims and NDCs . . . . . . . . . . . . . . . . . . . . . . . 36
2.3.2 Main features of Paris Agreement. . . . . . . . . . . . . . 38
2.3.3 Criticism and outlook . . . . . . . . . . . . . . . . . . . . 41
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CONTENTS
3 European Union Emission Trading Scheme 45
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.1.1 Choosing the right mechanism . . . . . . . . . . . . . . . 45
3.1.2 Compliance periods . . . . . . . . . . . . . . . . . . . . . 47
3.1.3 Objective of the system . . . . . . . . . . . . . . . . . . . 49
3.1.4 Other main features . . . . . . . . . . . . . . . . . . . . . 50
3.1.5 Registry, MRV and compliance . . . . . . . . . . . . . . . 51
3.2 Allocation of Allowances . . . . . . . . . . . . . . . . . . . . . . . 57
3.2.1 Emissions cap . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.2.2 Free allocation of allowances . . . . . . . . . . . . . . . . 59
3.2.3 Auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.3 Trading Permits and Price Behavior . . . . . . . . . . . . . . . . 68
3.3.1 European Union Allowances . . . . . . . . . . . . . . . . . 68
3.3.2 International credits . . . . . . . . . . . . . . . . . . . . . 69
3.3.3 Price behavior . . . . . . . . . . . . . . . . . . . . . . . . 72
3.4 Reform of EU ETS and Outlook . . . . . . . . . . . . . . . . . . 76
3.4.1 Structure reform in phase 3 . . . . . . . . . . . . . . . . . 77
3.4.2 Outlook for post 2020 phase . . . . . . . . . . . . . . . . . 79
4 Financial Modelling of EU ETS and its Derivative 81
4.1 Background and Introduction . . . . . . . . . . . . . . . . . . . . 81
4.2 Univariate EUA Pricing Model and Parameter Estimation . . . . 85
4.2.1 Univariate model . . . . . . . . . . . . . . . . . . . . . . . 85
4.2.2 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.3 Bivariate Pricing Model for EUA . . . . . . . . . . . . . . . . . . 97
4.3.1 Model description . . . . . . . . . . . . . . . . . . . . . . 97
4.3.2 Calibration to historical data . . . . . . . . . . . . . . . . 100
4.4 Option Pricing and Market Forward Looking Information . . . . 105
4.5 Further Discussion on Modelling EUA Prices . . . . . . . . . . . 108
4.5.1 Introduction of pricing theory . . . . . . . . . . . . . . . . 108
4.5.2 Choosing appropriate cumulative emission process . . . . 110
5 Linking Systems and Effect of Carbon Prices 115
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
5.2 Model of Bilateral Systems . . . . . . . . . . . . . . . . . . . . . 117
5.2.1 Model description . . . . . . . . . . . . . . . . . . . . . . 117
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CONTENTS
5.2.2 Model results . . . . . . . . . . . . . . . . . . . . . . . . . 119
5.3 Model of Unilateral Systems . . . . . . . . . . . . . . . . . . . . . 124
5.3.1 Model description . . . . . . . . . . . . . . . . . . . . . . 124
5.3.2 Model results . . . . . . . . . . . . . . . . . . . . . . . . . 125
5.4 International Background and Outlook . . . . . . . . . . . . . . . 127
6 Conclusion 131
6.1 Results of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . 131
6.2 Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
6.3 Further research . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Bibliography 135
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CONTENTS
vi
List of Figures
1.1 Types of environmental policy instruments and their applications 4
1.2 Structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Burden Sharing targets for EU-15 countries to Kyoto Protocol . 25
2.2 NDC and global stocktaking mechanism . . . . . . . . . . . . . . 40
3.1 Emission reduction targets of EU’s 2020 package for ETS and
non-ETS sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.2 Emission reduction targets of EU’s 2030 framework for ETS and
non-ETS sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.3 The chronological EU ETS compliance cycle . . . . . . . . . . . . 55
3.4 Cap of phase 3 in stationary installations and the aviation sector 59
3.5 Estimated amount of allowances to be auctioned in phase 3 . . . 67
3.6 Trading volume of EUAs from 2005 to 2015 . . . . . . . . . . . . 70
3.7 Share of traded volume of exchanges in 2013. . . . . . . . . . . . 73
3.8 Share of traded volume in Mt. of 2012 (inner ring) and 2013
(outer ring) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.9 EUA front year futures contract prices and traded volume . . . . 75
4.1 HistoricalpricesoftheEUAfutureswithmaturitiesinDecember
from 2005 to 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . 92
4.2 Statistical analysis of EUA 07, time period 05-06 and 06-07. . . . 95
4.3 Statistical analysis of EUA 12, time period 05-06 and 06-07. . . . 95
4.4 Statistical analysis of EUA 12, time period 07-08 and 08-09. . . . 95
4.5 Statistical analysis of EUA 12, time period 09-10 and 10-11. . . . 96
4.6 Statistical analysis of EUA 12, time period 11-12. . . . . . . . . . 96
4.7 MPR, futures price and price transformation from 01.2007 to
12.2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
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LIST OF FIGURES
4.8 Negative correlation of MPR and price transformation. . . . . . . 104
4.9 Statistical tests for the residuals. . . . . . . . . . . . . . . . . . . 105
4.10 Futures price and call option prices with K = 15 from 2005 to
2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
4.11 Call option prices comparison for durations of 1, 3, 6, 12 months
on EUA 2012 for different strikes. . . . . . . . . . . . . . . . . . . 107
5.1 Price convergence behavior in a bilateral linking system . . . . . 123
5.2 Price convergence behavior in a unilateral linking system . . . . 127
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