The Purpose of this report is to provide an overview of the pricing mechanisms in the European Co2 emission trading scheme ETS. The report explains the links between the international climate agreement the Kyoto protocol and the ETS. With a theoretical background in a simple supply and demand model a model is set up to explain the theoretical behavior of the price under ETS. The model explains how political and market factors are expected to influence the price under ETS. It is shown that the price is influenced by three central factors. These are the political determined supply of Co2 permits, the base case scenario for emissions, and the potential for the market to reduce the emissions. To analyze the influence of the market factors, the analysis must be conducted in periods where the political factors are constant. The period from 2008 to 2012 is the second phase of the ETS. The prices during this period are analyzed quantitatively by the use of linear regression. It is analyzed whether the prices are influenced by the expected activity in the energy sector measured by an index of stockprices from the energy sector, the difference between the prices of coal and natural gas, and weather-related factors. The analysis concludes that the Co2 price is highly influenced by the activity in the energy sector. The analysis also show that the difference between the coal and gas prices does not have the influence on the Co2 prices that was expected before the analysis was conducted. The missing influence of this fuel switch can probably be explained by the financial crisis, that has influenced the coal and gas prices in the period from 2008 and forth. The last part the report analyzes the expected level of the Co2 price during ETS phase 3 which is the period from 2013 to 2020. Because of the lack of quantitative data for this period the analysis will focus on the expected changes in the explanatory factors developed in the model. It is shown how these changes are expected to influence the prices during ETS phase 3. One important factor for this period is shown to be a reduced quantity of Co2 permits for the period. Therefore the need for reductions will rise in the period. Another important factor is that the base case scenario for emissions is expected to rise as well, also increasing the need for emission reductions. It is not estimated that the potential for reductions under phase 3 will be significantly large enough to cover the expected rise in demand for polluting emissions. The Co2 prices are therefore expected to rise during ETS phase 3. The rising prices can be necessary for ETS to function according to the idea. A price in the level observed so far does not provide polluters with the right incitement to reduce emissions. It is therefore open to discussion whether the free market is the best way to set prices under a cap and trade system.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||81|