Chapter 6 Grand Summary and Conclusion
B. Domestic situation and policy implications
2. Conclusion and Direction of Future Research
This study analyzed the characteristics, strengths, and weaknesses of consignment auctions for emissions allowances, and reviewed the feasibility of using such a system in Korea. It found that some of the advantages of consignment auctions can be achieved through effective utilization of the emissions allowances trading system soon to be introduced here. Thus, this study concluded that introduction of a consignment auction system in Korea should be delayed. This paper examined diverse aspects of consignment auctions through a case study, behavioral economic analysis, and game theory analysis. Results showed that: cognitive bias exists in emissions allowance trading in Korea; cognitive bias is greater among workers directly involved in allowances trading than among the general public; and prices discovered through consignment auctions are valid only for a limited time.
Lastly, the direction of future research should focus on three aspects.
First, it is necessary to research whether GHG emissions were reduced, and were reduced efficiently, through phase I of the ETS plan. It would not be easy, but it is necessary to verify the effect of the ETS on emissions reduction not only based on corporate cases but also on econometric analysis of actual data. Econometric analysis of the adequacy of emissions allowances trading, a measure of efficient emissions reduction, will also be necessary.
In this process, it would be desirable to refer to the framework of analysis used for the financial markets.
Second, this study found cognitive bias was present in connection with allowances trading, through interviews with companies, surveys, and behavioral economics tests. Continued research is necessary on ways to alleviate this cognitive bias. Strengthening education and public relations as a policy tool might be a solution, but theoretical research would be required for action to be effective.
Third, it is necessary to conduct research on where the auction revenue will be spent. As discussed, auctions were introduced from phase II of the ETS plan and are to be gradually expanded. It is necessary to set a direction for policy regarding whether auction revenue should be used to develop technology, or support the vulnerable sector, or to build a portfolio, and for this, research is needed.
References 1. Domestic literature
Relevant Ministries. (2017). Measures to Stabilize the Emissions Allowances Trading Market, Ministerial Meeting on Economic Relations, 17-6.
Ministry of Economy and Finance (2014). Basic Plan on Emissions Trading System (Draft).
Gilhwan Kim, Seonghee Shim (2017). Diagnosis of Korea’s Emissions Trading System and Plans for Improvement. Korea Energy Economics Institute’s ad hoc research report, 1-96.
Article 36 (2) of the Enforcement Decree to the Act on the Allocation and Trading of Greenhouse Gas Emission Permits (Enforcement Decree to the Act on Trading of Emission Permits).
Seongyong Cheon, Eunseong Cho (2017). The Effect of Mental Accounting Period, Risk Aversion, and Pain of Payment on the Intention to Buy Insurance, Financial Planning Review, 10(3), 87-106.
Korea Exchange (2016). Current Status of KRX’s Emissions Allowance Trading.
Ministry of Environment (2018). National Allocation Plan for Emissions Allowances in Phase II of the Emissions Trading System Plan.
Greenhouse Gas Inventory and Research Center of the Ministry of Environment. (2018). Report on Results of Implementation of the Emissions Trading System in its 1st Year.
Yiseul Hong (2014). Determinants of EU-ETS Carbon Price - Focused on Surplus Allocated Allowances. Master's Degree Thesis in Seoul National University’s Graduate School of Environmental Studies.
2. Overseas
Burtraw, D., & McCormack, K. (2017). Consignment auctions of free emissions allowances. Energy Policy, 107, 337-344.
CARB (2010a). “Proposed Regulation to Implement the California Cap-and-Trade Program - Part Ⅰ Volume Ⅰ Staff Report: Initial Statement of Reasons”, California Air Resource Board.
CARB (2010b). “Proposed Regulation to Implement the California Cap-and-Trade Program - Appendix J Allowance Allocation”, California Air Resource Board.
CARB (2017). “California’s 2017 Climate Change Scoping Plan”, California Air Resources Board.
CARB (2018a). “Legal Disclaimer & User’s Notice”, California Air Resources Board.
CARB (2018b). “Summary of Vintage 2014-2016 Electrical Distribution Utility Allocated Allowance Value Usage”, California Air Resources Board.
Chan, Eugene Y. (2015). Endowment effect for hedonic but not utilitarian goods, International Journal of Research in Marketing, 32, 439-441.
Fama, E. F. (1970, May). Efficient capital markets: A review of Theory and empirical work. The Journal of Finance, 25(2), 383-417.
Hahn, Robert W. and Roger G. Noll. (1981). Designing A Market for Tradable Emissions Permits, California Institute of Technology (Division of the Humanities and Social Sciences), Social Science Working Paper 398.
Hartman, R. S., M. J. Doane and Chi-Keung Woo. (1991). Consumer Rationality and the Status Quo, Quarterly Journal of Economics, 106, 141-162.
Horowitz, John K. and McConnell, Kenneth E. (2002). A Review of WTA/WTP Studies. Journal of Environmental Economics and Manage-ment, 44(3), 426-47.
Ibikunle, G., Gregoriou, A., Hoepner, A. G., & Rhodes, M. (2016). Liquidity and market efficiency in the world's largest carbon market. The British Accounting Review, 48(4), 431-447.
Kabneman, D. and M.W. Riepe. (1998). Aspects of Investor Psychology. Journal of Portfolio Management, 24(4), 52-65.
Kahneman, D., J. L. Knetsch, and R. H. Thaler. (1990). Experimental Test of the Endowment Effect and the Coase Theorem, Journal of Political Economy, 98(6), 1325-1348.
Kahneman, D., J.L. Knetsch, and R.H. Thaler. (1991). Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives, 5(1), 193-206.
Khezr, Peyman and Ian A. MacKenzie. (2016). Consignment auctions, Working Paper.
Khezr, Peyman and Ian A. MacKenzie. (2018). Consignment auctions, Journal of Environmental Economics and Management, 87, 42-51.
Knetsch, J. L. (1989). The endowment effect and evidence of nonreversible indifference curves. The american Economic review, 79(5), 1277-1284.
Knetsch, J. L. and J. A. Sinden. (1984). Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. The Quarterly Journal of Economics, 99(3), 507-521.
Kreutzer, J. (2006). Cap and trade: a behavioral analysis of the sulfur dioxide emissions market. NYU Ann. Surv.
Am. L., 62, 125.
Krishna, Vijay. (2010). Auction theory 2nd ed.
Lerner, J. S., Small, D. A., and Loewenstein, G. (2004). Heart strings and purse strings: Carryover effects of emotions on economic decisions. Psychological Science, 15(5), 337–341.
Lin, Chien-Huang; Huang, Wen-Hsien; Zeelenberg, Marcel. (2006). Multiple reference points in investor regret, Journal of Economic Psychology, 27(6), 781-792.
List, John A. (2003). Does market experience eliminate market anomalies?. The Quarterly Journal of Economics, 118(1), 41-71.
Martinez, L. F., Zeelenberg,M., and Rijsman, J. B. (2011). Regret, disappointment and the endowment effect.
Journal of Economic Psychology, 32(6), 962–968.
Novemsly, Nathan and Daniel Kahneman. (2005). The Boundaries of Loss Aversion, Journal of Marketing Research, 42(2), 119-128.
O’Donoghue, Ted and Jason Somerville. (2018). Modeling Risk Aversion in Economics, Journal of Economic Perspectives, 32(2). 91–114.
Plott, Charles R., and Kathryn Zeiler. (2005). The willingness to pay-willingness to accept gap, the “Endowment Effect,”subject misconceptions and experimental procedures for eliciting valuations., American Economic Review, 95(3), 530–545.
___________________________________ (2011). The Willingness to Pay—Willingness to Accept Gap, the
“Endowment Effect,”Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Reply,
American Economic Review, 101(2), 1012–1028.
Prelec, Drenzen and George Loewenstein. (1998), The Red and The Black Mental Accounting of Savings and Debt, Marketing science, 17(1), 4-28.
Rajagopal, P. and J.-Y. Rha. (2009). The Mental Accounting of Time, Journal of Economic Psychology, 30(5), 772-781.
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Saqib, N. U., Frohlich, N., and Bruning, E. (2010). The influence of involvement on the endowment effect: The moveable value function. Journal of Consumer Psychology, 20(3), 355-368
Seiler, Michael J.; Seiler, Vicky L.; Traub, Stefan; Harrison, David M. (2008). Regret Aversion and False Reference Points in Residential Real Estate. Journal of Real Estate Research, 30(4), 461-474.
Shefrin, H. and M. Statman. (1985). The disposition to sell winners too early and ride losers too long: Theory and evidence. The Journal of finance, 40(3), 777-790.
Soman, D. and J. T. Gourville. (2001). Transaction Decoupling: How Price Bundling Affects the Decision to Consume, Journal of Marketing Research, 38(1), 30-44.
Soman, D. (2001). The Mental Accounting of Sunk Time Costs: Why Time is not Like Money, Journal of Behavioral Decision Making, 14(3), 169-185
Soster, R. L., A. Monga, and W. O. Bearden. (2010). Tracking Costs of Time and Money: How Accounting Periods Affect Mental Accounting, Journal of Consumer Research, 37(4), 712-721
Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39-60.
Thaler, R. H. (1999). Mental Accounting Matters, Journal of Behavioral Decision Making, 12(3), 183-206.
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3. Websites
Ministry of Economy and Finance (January 28, 2014) Basic Plan on the Emissions Trading System Finalized.
Press Release (accessed on: December 12, 2018)
http://www.moef.go.kr/nw/nes/detailNesDtaView.do?searchBbsId1=MOSFBBS_000000000028&search NttId1=OLD_4020294&menuNo=4010100
Digital Times (May 2, 2016) Gov’t Raises Borrowing Limit on Emissions Allowances, Businesses Call It Stopgap Measure (accessed on: October 30, 2018)
http://www.dt.co.kr/contents.html?article_no=2016052002109932814003
The Korea JoongAng Daily (October 10, 2018) Emissions Allowances Spike 159% in 3 Years (accessed on:
October 30, 2018)
https://news.joins.com/article/23032610
The Korea Economic Daily (March 7, 2017) [editorial] Controversial Emissions Trading System Should be Revoked (accessed on: October 30, 2018)
http://news.hankyung.com/article/2017030712061
Assembly Bill No. 32, the California Global Warming Solutions Act of 2006 (accessed on: October 26, 2018) http://www.leginfo.ca.gov/pub/05-06/bill/asm/ab_0001-0050/ab_32_bill_20060927_chaptered.pdf California Code of Regulations, Title 17 Subchapter 10 Article 5, California Cap on Greenhouse Gas Emissions
and Market-Based Compliance Mechanisms (accessed on: October 26, 2018) http://ccr.oal.ca.gov/linkedslice/default.asp?SP=CCR-1000&Action=Welcome California Carbon Dashboard (2018) (accessed on: October 31, 2018)
calcarbondash.org
CARB (2018b), Archived Auction Information and Results (accessed on: October 31, 2018) https://www.arb.ca.gov/cc/capandtrade/auction/auction_archive.htm
CARB (2018c), Archived Auction Information and Results (accessed on: October 31, 2018) https://www.arb.ca.gov/cc/capandtrade/auction/auction_archive.htm
European Commission (2016). The EU Emissions Trading System (accessed on: October 31, 2018) https://ec.europa.eu/clima/sites/clima/files/factsheet_ets_en.pdf
Appendix
Survey on Consignment Auctions to Promote Emissions Allowance Trading and System Improvement Article 33 of the Statistics Act (Protection of
Secrets)
Matters belonging to the confidential information of individuals, corporations, organizations, etc. that has become known in the course of producing statistics shall be protected.
<Organized by>
Korea Energy Economics Institute
Chonnam National University’s Graduate School Specialized in Climate Change
We wish you and your company continued success and prosperity in the future.
Hello, this is the Korea Energy Economics Institute under the Prime Minister’s Office. Together with Chonnam National University’s Graduate School Specialized in Climate Change, we are conducting research on ways to promote emissions allowance trading and introduce consignment auctions.
Based on the experience and suggestions of personnel in charge of emissions allowances trading for target entities in the emissions trading system (ETS) during phase I (2015-2017) of the ETS plan, we seek to take remedial action to revitalize emissions allowance trading and gauge the possibility of introducing consignment auctions in Korea.
This survey takes phase I of the ETS plan as an evaluation period, and consists of three sections: experience and perception of the ETS, gauging the possibility of introducing consignment auctions, and an allowances trading simulation. We would be grateful if those responsible for management of greenhouse gases, energy or the environment as they relate to the ETS at your company or operation answer the survey.
For any inquiries, please call xx-xxxx-xxxx or email [email protected].
You and your company’s valuable responses will be kept confidential in accordance with Article 33 of the Statistics Act.
Thank you.
July 2018
For inquiries Specialized agency for survey
TEL / Email
• If you wish to receive the analysis report of this survey when it is published, please be sure to write down your email address and phone number below.
R1. Name R2. Department
R3. Position R4. Phone # ( )
R5. E-mail Verification
source
Editing Coding source
R6. Survey date
& time
( )mm ( )dd, 2018 at ( ) o’clock
0. Items for Classifying Company According to Characteristics Category Description
1. Company name
(or operation name)
1. Power
generation energy
2. Collective energy
3. Industrial complex
4. Mining
5. Food &
beverage
6. Textile 7. Wood 8. Paper
9. Oil refining 10. Petrochemical 11. Glass 12. Ceramics
13. Cement 14. Steel 15. Non-ferrous
metal
16. Machinery
17.
Semiconductors
18. Displays 19.
Electric/Electronics
20. Automobiles
21. Shipbuilding 22.
Telecommunications
23. Building 24. Water service
25. Waste 26. Airline 27. Other ( )
2. Industry 3.
Respondents’
department
1. Planning 2. General affairs 3. Judicial affairs/regulatory response 4.
Environment/energy 5. CSR/external affairs 6. Other ( )
4.
Respondents’
position
1. Executive or above 2. General manager 3. Deputy general manager/manager 4.
Assistant manager/staff
1. Experience and perception of the emissions trading system during phase I
Question 01. What did your company think of the emissions trading system during phase I? (Please tick the appropriate box below.)
Strongly disagree Neutral Strongly agree 1) The emissions trading system is essential
to responding to national climate change. 1 2 3 4 5 6 7
2) Given industrial competitiveness, the government should have postponed its implementation.
1 2 3 4 5 6 7
3) My company (agency) does not have much
interest in the ETS. 1 2 3 4 5 6 7
4) My company (agency) had little difficulty
responding to the ETS. 1 2 3 4 5 6 7
5) The impact of ETS implementation on my company (agency) and industry was not as significant as expected.
1 2 3 4 5 6 7
Question 02. How did your company respond to the emissions trading system? (Select the choice that is closest to your company’s response.)
1. Establishment of emissions reduction target and strategic response by the entire organization 2. Establishment and management of a response strategy by site
3. Response by the department in charge or designated staff
4. Response by the CSR/public relations department not directly related to the ETS 5. No response
Question 03. Which activities did your company or operation carry out in response to the emissions trading system during phase I?
My company (operation or agency) Strongly disagree Neutral Strongly agree 1) Meticulously identified ways to internally reduce
sources of greenhouse gas emissions. 1 2 3 4 5 6 7
2) Expanded investment in facilities/technology to
reduce emissions. 1 2 3 4 5 6 7
3) Accurately estimated marginal cost of internal
reduction of emissions. 1 2 3 4 5 6 7
4) Expanded investment in external emission
reduction projects (e.g. CDM). 1 2 3 4 5 6 7
5) Established and implemented an emissions
reduction roadmap and response strategy. 1 2 3 4 5 6 7
6) Made active use of allowances trading (selling or
buying). 1 2 3 4 5 6 7
7) Made active use of consulting/counseling with
outside experts. 1 2 3 4 5 6 7
8) Organized a dedicated decision-making body for
response (e.g. committee, dedicated department). 1 2 3 4 5 6 7
9) Often conducted education to raise employee
awareness of the emissions trading system. 1 2 3 4 5 6 7
10) Actively disclosed data on site’s carbon
(participation in CDP). 1 2 3 4 5 6 7
Question 04. What do you think were obstacles in responding to the emissions trading system during phase I? Please select up to three choices below.
1. Lack of understanding among and support from management
6. Uncertainty over government policies
2. Lack of understanding among and cooperation from other departments
7. Lack of information and response knowhow
3. Lack of understanding of policies on the emissions trading system
8. Technical limitations
4. Limited means of reducing emissions 9. Lack of government support 5. Cost of responding to the ETS (higher cost of
sales)
10. Other ( )
Question 05. Can you describe the emissions allowances allocated to your company?
1) Allocated allowances were insufficient.
How insufficient were they? About ( )% less than emissions How did you cover the shortfall?
1. Bought emissions allowances 2. Carried out internal emissions reduction activities 3.
Both 2) Allocated allowances were sufficient.
3) Allocated allowances were left over.
If you had emissions allowances remaining, what did you do with them?
1. Sold them 2. Banked them 3. Both
Question 06. Did you ever buy or sell emissions allowances on the emissions trading market during phase I?
1) Yes (bought) Engaged in trading about ( ) times Trading volume about ( ) 000 tons 2) Yes (sold) Engaged in trading about ( ) times Trading volume about ( ) 000 tons 3) No
Question 07-1. If you had emissions allowances remaining in phase I and you preferred banking to selling, what were the reasons behind such preference? (Select multiple choices. Select first and second choice.)
1. Wanted to prepare against potential shortage
2. Wanted to sell the surplus later on expectations of a price rise
3. Expected to be able to sell all the surplus given prospects on lack of supply for sale in the market 4. Postponed decision on selling allowances due to opaque outlook for the market or policies 5. Did not know what to do with surplus allowances
7. Other ( )
8. Not applicable (*You had no emissions allowances remaining or you did not prefer banking.)
Question 07-2. If emissions allowances were insufficient in phase I and you preferred borrowing to buying, what were the reasons behind such preference? (Select multiple choices. Select first and second choice.)
1. Expected the government to cover some of the shortage
2. To purchase emissions allowances at a lower price later as price was forecast to fall in the future 3. Expected future emissions to decrease, which would help cover the shortfall in phase I
4. Thought it would be reasonable to postpone decision-making on trading due to uncertainties surrounding the market and policies
5. Because it was difficult to buy emissions allowances due to a shortage of supply for sale in the market 6. To cover the shortfall with borrowing first and then settle it by end of phase I
7. Other ( )
8. Not applicable (*You did not have a shortage of emissions allowances or you did not prefer borrowing.)
Question 08. What do you think were stumbling blocks to active allowances trading during phase I?
(Select up to three choices.)
1. A shortage of allowances for sale due to unfairness in allocation of allowances to entities 2. Lack of information on appropriate allowance market price
3. Postponed selling or buying due to inordinate government intervention in the market (e.g.: Intentionally involved in market pricing)
4. A shortage of allowances for sale due to entities’ lackluster emissions reduction activities 5. Had little confidence in the trading market due to high volatility
6. Was unable to compare internal emission reduction cost with market price because of lack of data on cost of internal emissions reduction
7. Postponed selling or buying due to heightened uncertainty 8. Other ( )
2. Gauging the potential for consignment auctions in Korea
Consignment auctions require firms allocated free emissions allowances to consign all or part of those allowances to a third party (institutions specializing in auctions) to sell at auction to other firms in need of allowances. Through consignment auctions, firms purchase the number of emissions allowances they need, and the revenue from the auction is returned to the original allowance holder. This auction process is conducted before the full-fledged trading of emissions allowances. By engaging in consignment auctions prior to trading, firms can use prices to obtain information on the appropriate market prices of emissions allowances, thereby reducing a significant amount of uncertainty in the emissions allowance trading process.
For example, your company is allocated one million tons of free emissions allowances, and consigns all to an institution to sell at auction. According to internal analysis, your company needs 900,000 tons of emissions allowances this year. It participates in the auction conducted by the institution and wins 900,000 tons of allowances for KRW 20,000 per ton. It pays KRW 18 billion (KRW 20,000 per ton * 900,000 tons) and receives KRW20 billion (KRW20,000 per ton * one million tons). The KRW 20,000 settlement price can be seen as a proper market price as exposed in the auction.
The emissions trading system in California, USA, has been in place since 2013 and takes advantage of consignment auctions to reduce uncertainties over allowance prices.
Question 09. Have you ever heard of consignment auctions?
1. No 2. Have some knowledge of them 3. Well informed about them
Question 10. What are your expectations on the effect of consignment auctions?
Strongly disagree Neutral Strongly agree
1) Will help promote allowances trading 1 2 3 4 5 6 7
2) Will help alleviate uncertainty over the
allowances trading market 1 2 3 4 5 6 7
3) Will help companies respond to the ETS 1 2 3 4 5 6 7
4) Will have no effect 1 2 3 4 5 6 7
5) Will complicate the process of responding to the
ETS 1 2 3 4 5 6 7
6) Will make active use of them when they are
introduced 1 2 3 4 5 6 7
3. Allowances trading simulation
Suppose that you are authorized to make a final decision on your company’s emissions allowance trading. Read the following situation carefully, then, answer each question as honestly as possible.
Scenario 1
These questions are intended to see whether respondents understand the scenario accurately. There are correct answers. If you answer them incorrectly, subsequent answers will not be used for analysis.
“Your company has been allocated allowances by the government to emit 500,000 tons of carbon dioxide over one year from now. Your company expects to emit 400,000 tons of carbon dioxide over the coming year.
At present, you plan to sell a surplus of 100,000 tons in the allowances market.
The estimated emissions of 400,000 tons for the coming year may change. If allowances determined by decision-making on the transaction (400,000 tons if you decide to sell the surplus or 500,000 tons if you decide to keep them) exceed total emissions after one year, you can sell the surplus at the market price at that time. If they fall short of total emissions after one year, you will have to buy allowances at the market price at that time to make up the shortage.
In one year, the allowance price is estimated to be KRW 17,000-27,000/ton.
(Question)
If you do not sell 100,000 tons of allowances at the current market price of KRW 22,000 on the allowances market, actual emissions turn out to be 450,000 tons and the allowance price remains unchanged at KRW 22,000 a year later,
(1) How much cash will you receive at present? KRW ( )
(2) How much cash will you pay/receive to maintain allowances equivalent to your company’s emissions for a year? KRW ( )
There are no “correct” answers to the questions in the following two scenarios, so please write down your thoughts.
Scenario 2
“Your company has been allocated allowances by the government to emit 500,000 tons of carbon dioxide over one year from now. Your company expects to emit 400,000 tons of carbon dioxide over the coming year.
At present, you plan to sell a surplus of 100,000 tons on the allowances market.
The estimated emissions of 400,000 tons for the coming year may change. If allowances determined by decision-making on the transaction (400,000 tons if the surplus is sold or 500,000 tons if you keep them) exceed total emissions after one year, you can sell the surplus at the market price at that time. If they fall short of total emissions after one year, you will have to buy allowances at the market price at that time to make up the shortage.
In one year, the allowance price is estimated to be KRW 17,000-27,000/ton.
(Question)
What is the lowest allowance price that would motivate you to sell 100,000 tons of surplus allowances now?
KRW ___________ /ton