Munich plans to achieve carbon neutrality by 2035. In this research the focus is to develop a concise, economical and sustainable heat transformation strategy. Firstly, technologies with the lowest CO2 abatement costs by demand clusters were identified. Then their roll-out was assessed in two target-oriented and one reference scenario in a regionalized stock and flow model, including limitations for transformation speed. It becomes apparent that, due to limited realization capacity, the target can only be reached including compensation. Nevertheless, contemporary implementation of measures is of importance. Considerable investments of 7.3 Bio. Euro are necessary in the target-oriented scenarios, compared to 3.6 Bio. Euro in the reference. However, savings on fossil fuels exceed the additional costs, resulting in an overall economic benefit, also for tenants. This can only be achieved by an early start of a directly target-conform transformation of each building to minimize sunk costs. Support for the utility may be needed for an early extension and transformation of district heating as investments range between 740 and 1.500 Mio. Euro depending on the extension of district heating. The expected increase in electricity demand (average 12 %) and maximum load (average 35 %) until 2050 render sector-integrated planning and regulation substantial.

The municipality of Munich plans to achieve climate neutrality by 2035 making a concise, economical and sustainable heat transformation strategy mandatory. In order to derive such a strategy, firstly the technologies with the lowest CO2 abatement costs were identified for different demand clusters (defined by building demand and region). Then their roll-out and refurbishment in Munich were simulated in two target-oriented scenarios in a regionalized stock and flow model, including limitations of transformation speed (e.g. refurbishment rates). The results show that climate neutrality can only be achieved by 2035 when compensation measures are included. This is caused by the lack of capacity for the roll-out of climate neutral heating systems and target-conformity refurbishment. Nevertheless, implementing measures now is paramount to meeting the target soon after 2035. Considerable additional investments are necessary in the target-oriented scenarios. However, savings on fossil fuel expenditures exceed these costs, resulting in an overall economic benefit. From the point of view of the utility, support is needed for an early switch from natural gas to hydrogen in district heat generation. For tenants, heat supply transformation can result in cost reductions compared to a reference scenario in which natural gas is the main source of heat supply.

This study analyses factors related to allowance-trading behaviour for the first ten years of the existence of the European Union Emissions Trading System (EU ETS). Our empirical analysis employs a dataset that combines information on trading activities for more than 6000 companies with company characteristics. Indicators of trading activity include the volume and the number of transactions as well as the usage of intermediaries and of derivatives markets. For 2005–2014 and for the individual trading periods, we find that trading behaviour is related to the size of a company, its net position (the difference between free allocations and verified emissions), its sector affiliation, productivity, and location. We also find evidence that trading-related transaction costs affect trading activity in the EU ETS in all trading periods. Our results further suggest that net buyers (companies whose verified emissions exceed free allocations in a given year) are more likely to participate in emissions trading and to trade at higher volumes than net sellers are. We explain this asymmetry in behaviour—which might lead to a violation of Coase’s independence property—by potential asymmetries in the actual or perceived opportunity costs of holding allowances between net sellers and net buyers.

This paper is an empirical investigation of the role of banks in the EU Emissions Trading System (EU ETS). This topic is of particular interest considering that banks are responsible for a large and increasing share of overall transactions under the EU ETS and that they provide regulated companies with services related to emissions trading. Using both semi-structured interviews as well as descriptive and regression analysis, we investigated the different roles banks play in EU emissions trading and whether their importance as trading partners differs in relation to different types of regulated companies. Our regressions based on data from the first trading period of the EU ETS show that large companies with trading experience are more likely to choose a trading strategy involving interaction with a range of financial intermediaries, in particular banks or exchanges, than smaller, less professionalized companies, which tend to follow a trading strategy involving brokers (in particular for selling allowances). These findings can help policymakers decide on the level of involvement of non-regulated companies in their systems, which is currently allowed to varying degrees under different ETS. We recommend that this decision should be closely linked to provisions of market oversight and the level of control over the different types of financial players active in emissions trading.

In the discussion on the potential risk of carbon leakage related to the EU ETS and the effect of safeguard measures, the scope for passing through carbon costs into final product prices is considered a key issue. This study investigates whether and to what extent ETS-related carbon costs have been passed through into product prices by EU industry. Literature on the issue of carbon cost pass-through in industry, other than electric power generation, is relatively sparse and we therefore aim to add to the knowledge gathered in this area so far. We investigate a number of products in six industry sectors in several European countries and regions and provide estimates for carbon cost pass-through for more than 50 product/country pairs. In line with the literature, our econometric results imply significant cost pass-through for a number of products, with results being most conclusive for the cement, iron and steel, and refineries sectors. The extent of the estimated pass-through rates diverges between products and countries/regions. These findings are aimed at informing discussions about carbon leakage protection for industries covered by the EU ETS.

Cap and trade systems are considered to be one of the most cost-efficient options to achieve emission reduction targets. This paper extends the literature on the evaluation of emissions trading systems (ETS) by providing insights into the methodology of the ex-post evaluation of cost-efficiency. Based on data from the second trading period of the EU ETS, this paper compares different settings for ex-post cost-efficiency analyses. A highly disaggregated base scenario reveals average cost savings from trade of about 865 million Euro p.a., an efficiency gain of 47% compared to the alternative policy scenario without trade. Sensitivity scenarios indicate lower efficiency gains in cases with higher sectoral and regional aggregation emphasising the importance of infra-industry and inter-country trade. Furthermore, assumptions regarding the abatement requirements under the alternative policy play a key role, along with the choice of marginal abatement cost curves. In line with ex-ante results from the literature, the backward looking empirical results of this paper uniformly support the theoretical cost-efficiency of the EU ETS.

This paper analyses distributional effects between participants of the EU Emissions Trading System (EU ETS) during its first trading period. To this end, a selection model is formulated and applied to a dataset based on account information and transfer data from the EU Transaction Log (EUTL). Four different ways of adding carbon prices to the dataset are explored. Findings confirm that whether a company made a gain during the first period of EU emissions trading is highly dependent on the level of free allocation it received. Consequently, large industrial companies, especially in the iron and steel and cement sectors emerge as the biggest 'winners' as they were the companies with the highest allocation surplus. This also applies to a number of electricity generators located in Central and Eastern Europe. Policy makers therefore have to be mindful about decisions regarding the level of free allocation to individual sectors and companies, as those design choices have a large influence on the way in which gains and costs are distributed under the system, which in turn has repercussions on its political acceptability. Rules for free allocation are harmonised at EU-level since the beginning of the third trading period, but relatively generous free allocation to industrial sectors and additional sources of unequal treatment remain. The analysis also confirms that small companies were less likely to participate, which points to the existence of significant transaction costs preventing many small companies from realising potential gains on the market (as well as jeopardising the efficiency of the system). It is therefore important to reduce transaction costs for small companies, in particular at the beginning of an ETS, in order to incentivise market entry.

In this paper we investigate empirically the role of the financial sector in the EU Emissions Trading Scheme (EU ETS). This topic is of particular interest, since non-regulated entities are likely to have played important roles in increasing the efficiency of the EU ETS by reducing trading transaction costs and providing other services. The introduction of the Markets in Financial Instruments Directive (MiFID) resulted in many banks closing down their commodity trading desks (including for carbon) and it is unclear how this will impact on the functioning of the carbon market. Our regressions based on data from the EU Transaction Log show that large companies and those with trading experience are more likely to interact with the financial sector and thus we expect a higher impact on larger companies from MiFID compared to the smaller ones. Our semi-structured interviews confirm that banks played multiple roles in the EU carbon market particularly as hedging partners for larger companies in the energy sector. Whether this role may be taken on by other financial players is unknown at this stage.

What can we learn from progress to date-and what is missing?......... 44

Emissions trading schemes theoretically lead to an efficient achievement of a given reduction target since companies with the lowest marginal cost of abatement reduce their emissions and may sell surplus permits, while companies that face high abatement costs purchase permits to cover their greenhouse gas emissions (Baumol and Oates 1975). These trading activities should achieve an efficient final allocation of permits between regulated entities where the marginal abatement costs are equalised. Textbook theory of emissions trading usually focusses on trading of regulated entities. But in reality non-regulated entities are also actively involved in the market for emission allowances. In the context of the EU Emissions Trading Scheme (EU ETS), the financial sector has been particularly active on the market for EUAs (Betz and Schmidt 2015). The total trading volume during the first trading period at 1.8 million EUAs was about five times higher than the minimum trading volume necessary for all installations to become compliant (350 million EUA, i.e. the sum across all short positions over the whole trading period). That shows that trading was not done for compliance purposes only. In fact, 45 % of the total volumes traded during the first trading period, involved one or two accounts of companies without a liability on the market (banks, brokers, traders, exchanges and investment trusts and funds). More than half of this volume goes through accounts of banks (24 % of the total), via exchanges (8 %), through a dedicated future clearing account (London Clearing House – LCH, 6 %) and the remainder via brokers, (own-account) traders and trusts and funds (7 %). Thus, our analysis of EUTL data highlights the important role of financial actors in the first trading period. We are therefore particularly interesting in the following two questions (Cludius and Betz, forthcoming): First, how has the financial sector shaped or supported the behaviour of regulated companies in the first trading phase? Second, what will be the potential implications of the new regulations for the financial sector on the roles banks have played in the past and how will this impact regulated entities? Figure 1 shows the involvement of the different types of financial actors over time. Prominent spikes can be observed in March-April and December each year, corresponding to activity related to the allocation and surrendering of allowances and the delivery of forward and future contracts respectively.