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Does the spread between coal and gas prices affect the price of EU emissions allowances? IAFA Conference NUI Galway, May 2012 Peter Deeney

Emission Allowances

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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. - PowerPoint PPT Presentation

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Page 1: Emission Allowances

Does the spread between coal and gas prices affect the price of EU emissions allowances?

IAFA ConferenceNUI Galway, May 2012

Peter Deeney

Page 2: Emission Allowances

IAFA 2012 NUI Galway 2

What’s an Emission Allowance?What Changes Price?Data Regression AnalysisConclusion

Page 3: Emission Allowances

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Permission to emit one tonne of CO2.

Page 4: Emission Allowances

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Permission to emit one tonne of CO2.

........How much should this cost?

Page 5: Emission Allowances

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European Emission Allowances - EUAs

Certified Emission Redutions - CERs.

Emission Reduction Units – ERUs.

Page 6: Emission Allowances

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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.

Page 7: Emission Allowances

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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.

Page 8: Emission Allowances

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Emission Reduction Unit ERU

Created in the Annex countries. Less worry about delivery.

Page 9: Emission Allowances

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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.

Page 10: Emission Allowances

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Scarcity

Page 11: Emission Allowances

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Scarcity

(Perception of high activity or cheap fuel)

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Scarcity

Abundance

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Scarcity

Abundance (Perception of low activity or over

allocation.)

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Emission AllowancesChanges in Price LiteratureDataMethodsConclusion

Page 15: Emission Allowances

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 15

Page 16: Emission Allowances

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 16

Page 17: Emission Allowances

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 17

Page 18: Emission Allowances

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 18

Page 19: Emission Allowances

Increase Consumer Goods indicates increased use and purchase, hence increased GHG, increased EUA

IAFA 2012 NUI Galway 19

Page 20: Emission Allowances

Brent

Consumer

Spread

Stoxx

IAFA 2012 NUI Galway 20

Page 21: Emission Allowances

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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

Page 22: Emission Allowances

EUA are not physically needed,

Required in March by regulated emitters.

Page 23: Emission Allowances

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

Page 24: Emission Allowances

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6

8

10

12

14

16

18

2011

EUA

5500

6000

6500

7000

7500

8000

8500

9000

9500

10000

10500

2011

BrentEuro

200

210

220

230

240

250

260

270

280

290

300

2011

Stoxx

280

300

320

340

360

380

400

2011

Consumer

0

20

40

60

80

100

120

140

160

2011

Spread

Page 25: Emission Allowances

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 25

Page 26: Emission Allowances

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.

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Page 27: Emission Allowances

The p value is the probability of observing the data with the hypothesis that the time series is not stationary.

IAFA 2012 NUI Galway 27

Page 28: Emission Allowances

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 28

Page 29: Emission Allowances

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 29

Page 30: Emission Allowances

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 30

Page 31: Emission Allowances

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 31

Page 32: Emission Allowances

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Page 33: Emission Allowances

Two Year EUA = 5.54 *** - 0.000976 Brent *** - 0.00809 Consumer

- 0.0143 Spread * + 0.0715 Stoxx ***

R2 = 69%

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Page 34: Emission Allowances

Brent

Consumer

Spread

Stoxx

IAFA 2012 NUI Galway 34

Page 35: Emission Allowances

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6

8

10

12

14

16

18

Apr Jul Oct 2011 Apr Jul Oct 2012

EU

A

Page 36: Emission Allowances

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 36

Page 37: Emission Allowances

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 37

Page 38: Emission Allowances

First Period Consumer, non-stationary p= 0.93 ChConsumer, stationary p= 10-7

Spread, non-stationary p = 0.77 ChSpread, stationary p= 10-8

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Page 39: Emission Allowances

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 39

Page 40: Emission Allowances

First Period EUA = 16.35*** + 0.000827 Brent *** + 0.0228

Consumer*** - 0.0287 Spread *** - 0.0501 Stoxx ***

R2 = 40%

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Page 41: Emission Allowances

Brent

Consumer

Spread

Stoxx

IAFA 2012 NUI Galway 41

Page 42: Emission Allowances

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

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Page 43: Emission Allowances

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6

7

8

9

10

11

12

13

14

15

16

Jul Aug Sep Oct Nov Dec 2012 Feb Mar

EU

A

Page 44: Emission Allowances

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 44

Page 45: Emission Allowances

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 45

Page 46: Emission Allowances

Second Period EUA = 19.34*** - 0.00218 Brent *** + 0.00592 Consumer

- 0.0186 Spread ** + 0.0345 Stoxx *

R2 = 70%

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Page 47: Emission Allowances

Brent

Consumer

Spread

Stoxx

IAFA 2012 NUI Galway 47

Page 48: Emission Allowances

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

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Page 49: Emission Allowances

Brent ?

Stoxx ?

Consumer ?

Spread

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Page 50: Emission Allowances

Residuals against Date should not show an interesting pattern....

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Page 51: Emission Allowances

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-1.5

-1

-0.5

0

0.5

1

1.5

Apr Jul Oct 2011 Apr Jul Oct 2012

resi

du

al

Regression residuals (= observed - fitted ChEUA)

Page 52: Emission Allowances

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Page 53: Emission Allowances

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-5

-4

-3

-2

-1

0

1

2

3

4

Apr Jul Oct 2011 Apr Jul Oct 2012

resi

du

al

Regression residuals (= observed - fitted EUA)

Page 54: Emission Allowances

7 peaks over 2 years?

This also happens in the Regime models.

Seasonal

Buy EUA for March

Data – discounting from futures and forwards

IAFA 2012 NUI Galway 54