INSEAD Library

Includes bibliographical references

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Carbon Trading and Pricing Contents 1. Market players ..............................................................1 Four types of players Governments Financial players Industrials Energy companies Impacts on the carbon price Practical problems 2 3 8 14 16 17 19 2. Price drivers ........................................................................................... 2I Relationships between carbon, power, coal, gas and oil markets 22 Data used 22 Long-term price trends 23 Carbon Power prices Coal prices Oil prices Gas prices Merit order of power plants Spark and dark spreads The energy iceberg Fuel-switching prices for carbon Sensitivity analysis for switching prices Comparison with UK Department of Trade and Industry assumptions Inter-relationships in the energy iceberg Market volatility: long term versus short term Regression relationships 23 24 28 30 32 39 41 44 46 48 49 49 50 51 3. Supply and demand ......................................................59 Distance to Kyoto target: countries Distance to EU ETS target Market shock: 2005 data Long or short? Missing megatons and data discrepancies Asymmetry of long and short positions Reconciling Kyoto targets with EU ETS positions Cost of supply of EU allowances: comparison of options Conclusion 60 62 64 67 68 70 70 73 74 4. Market inefficiencies: regulatory effects Improving emissions data quality Auctioning Taxation:VAT Case study: centralisation of allowances Taxation: corporate taxes The impact of the Linking Directive New entrants and plant closures Legal status of allowances Possibility of price manipulation Timing ..................... 77 77 78 78 80 81 82 84 85 85 86 5. Carbon projects ............................................................ 87 Another compliance option Analysis of the markets for CERs, ERUs and AAUs AAUs Supply and demand for CERs and ERUs Prices and volumes Types of projects: cost effectiveness Buyers: EU, Japan and Canada Sellers: Brazil, India, China Projecting the 2008 shortfall 87 90 91 93 95 97 98 100 101 6. The future...................................................................................... The next EU allocation process Auctioning Extensions of the EU ETS Technology developments Country positions The US Canada Japan 103 103 104 105 105 106 106 107 108 Appendix. Bibliography Carbon funds ............................................................ 111 119