Managing incentives for greenhouse gas emission reduction
The Paris Agreement sets out the goal of limiting the increase in global average temperature to within 2°C. Incentive mechanisms and low-carbon policies, such as emission trading schemes (ETS), feed-in tariffs, carbon taxation, renewable obligation and emission performance standards, are key instruments for achieving greenhouse gas emissions reduction. The cap-and-trade ETS is one of the most popular policy instruments in controlling greenhouse gas emissions. The carbon price quoted from the ETS allowances price is usually considered by investors as the economic value of carbon emissions in formulating a long-term investment decision. However, the allowances price is currently quite low across jurisdictions. Thus, in order to incentivise large-scale and long-term low-carbon investment, a clear and strong carbon pricing signal is essential. There are divergent but increasingly prevalent views that additional policies may affect carbon prices, as the emission reduction effect of parallel policies would reduce the demand for allowances in the ETS, thus lower carbon prices could hamper the ETS’s capacity to promote low-carbon technologies over the medium and long term. This PhD study investigates how parallel energy and climate policies might affect carbon pricing in ETS and illustrates stakeholders’ views on this impact. The study defines the ‘cross-over effect’ of parallel energy and climate policies. A two-stage survey, including a closed-form questionnaire followed by open interviews, was conducted to elicit views and expectations of stakeholders on one of the carbon markets in China, the Guangdong ETS pilot, with an emphasis on perspectives on how the ETS may interact with other existing or proposed low-carbon and clean energy policies. Our survey results show that academic stakeholders, more than stakeholders from other sectors, viewed the policy interactions as a significant issue for developing a carbon market in China, and there was a positive correlation between recognition of such policy interactions and the time spent on energy saving and emission reduction policies. Relatively few respondents identified correctly the fact that both increasing renewable targets and imposing a carbon tax in addition to an existing ETS would be expected to depress prices in the ETS. Apart from government respondents, all other key stakeholders generally lacked confidence in China’s carbon markets, due to their lack of knowledge and information about the market and their concerns regarding uncertainties and failures in government policy and regulation. Subsequently, an empirical study was conducted to probe the underlying rationality of pricing behaviour and the effect of policy interaction with low-carbon policy in seven ETS pilots in China using ordinary least square and event-based regression. The empirical results show that, first, crude oil and domestic liquid natural gas are positively linked to the allowance price in the Beijing, Shanghai and Guangdong pilots, while coal price lacks explanatory power. Second, extreme weather is positively correlated with Shenzhen carbon prices. Third, in contrast to existing studies, a positive correlation is found between renewable energy supply and carbon prices in the Tianjin carbon market, and low-carbon policy that intends to promote renewable energy would increase carbon prices in the Guangdong pilot. Finally, ETS regulatory events, such as the announcement on surrender date (adjustment) and offset limitation, will increase price variations in the Shenzhen and Tianjin pilots respectively. Overall, the empirical results currently indicate that ETS pilots in China are segmented, but not as rational as previous studies suggest. Finally, the potential benefits of linking emissions markets across countries and regions are well recognised. In theory, a global market provides more flexibility for parties to achieve reductions in emissions at the lowest marginal cost across all covered sectors. Therefore, quantifying the impact of emission trading market linkage would generate essential references for the forming of a global market. Driven by the above motivation, the GTAP-Energy (GTAPE) model was employed to assess the impact of carbon market linkage. Our results indicate that, although the abatement costs increase in the Chinese carbon market after the linkage, the strong and robust carbon price could give investors a correct signal on the value of carbon emission. Furthermore, a linkage between the Chinese carbon market and the international markets leads to a significantly smaller GDP reduction in China, 0.04% compared to the non-linkage scenario (0.88%). In addition, allowing multilateral trading of emissions among these countries shifts the burden of the reduction away from oil products in the relatively carbon-efficient economies towards coal in the less carbon-efficient regions. This induces a substantial reduction of the marginal abatement costs in the above economies. In summary, this PhD research investigates stakeholders’ views on the Chinese carbon market as well as interactions between energy and climate change policies; it also discovers the price drivers for carbon prices in China’s pilot ETSs and assesses the impact of including Chinese ETSs in a global emission trading system. Moving forward, as the results suggest that the Chinese pilot ETSs may not be rational and most market participants are not fully aware of the function of the carbon market since they merely fulfil the need for government. The next step would be to discover whether there is a media effect driving carbon prices.
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