Carbon price estimation in the EU Emissions Trading Scheme (ETS) 2005 - 2007 based on emission abatement costs and supply-demand balance of emission allowances

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Helsinki University of Technology | Diplomityö
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According to EU Emissions Trading Directive 2003/87/EC, EU Emissions Trading Scheme (EU ETS) starts on 1st January, 2005. The start-up of the scheme means that carbon dioxide (CO2) will have a monetary value for the ETS participants. EU ETS will cover some 13 000 installations, 6 000 companies and around 46% of EU-wide (CO2) emissions by 2010. EU ETS is a strategic policy instrument helping Member States to fulfil their legally binding Kyoto commitments during the period 2008 - 2012. Allowance price estimates given in the literature vary between 1 and 15 &#128 for the EU ETS first trading period 2005 - 2007. Allowance forward prices have fluctuated from 6 to 13 &#128 during 2003 - 2004. In theory, the main determinants of the allowance price are allowance supply-demand balance and CO2 emissions marginal abatement costs (MAC). In the EU, ETS allowance supply is determined by the total allocation of allowances and Kyoto project-based mechanisms credit imports. Demand for allowances is based on the forecasted business-as-usual (BAU) emissions scenarios, which in this thesis have been estimated by a trend line analysis of historic EU ETS sector CO2 emissions. MACs of CO2 emissions have been studied by reviewing the literature on the topic. During the first trading period, MACs are to a great extent based on the cost of fuel switches from coal to gas in power production. According to this study, the allowance supply-demand balance estimates during the first trading period in EU ETS will vary from a 5.1 Mt CO2 deficit to 143.4 Mt CO2 surplus of allowances. As the supply exceeds the demand, the estimated allowance price is predicted to remain very low. When the final allocation is set by the Commission, the allowance supply may change. If the demand exceeds the supply, the allowance market price is based on the estimated CO2 abatement costs. Abatement potential under &#128 10/t CO2 varies from 25 to 145 Mt CO2 according to different estimates. Abatement costs increase very heavily after 150Mt CO2 abatement has been taken. A sensitivity analysis for the price determinants was performed. Political decisions, annual hydro power availability, fuel prices, and electricity demand forecasts cause the main fluctuations in the allowance market prices.
Fogelholm, Carl-Johan|Pohjola, Tuula
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Niininen, Heikki
carbon price, emissions trading, CO2 emissions, emission allowances
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