The indirect impacts of carbon futures on shipping : a case study from steel industry

Abstract

Emissions Trading Scheme (ETS) is a market-based approach under Kyoto Protocol for efficient reduction of greenhouse gas emissions. Many regional ETSs have been implemented, and some regions have established futures markets for emission allowance, namely "carbon futures", to enable the manufacturers to hedge the risk of price fluctuation. In addition to risk management and speculation, manufacturers can also use carbon futures in their production planning to improve economic efficiency. This will affect the production process, as well as the transportation demand for raw material. Taking steel industry as a case study, this research establishes a two-period short-term model to explore the possibility of using carbon futures to re-adjust the steel production and raw material inventory, to maximize the total profit in two periods. The indirect impact of carbon futures on shipping volume and freight market is researched. This research also analyses the relationship of steel price with that of the raw materials including iron ore and coke, and freight rate for simulation. The results show that when the carbon futures price is high enough, steel plants will produce more in period one for sale in period two. This increases the emission and shipping volume in period one. When futures price is low enough, steel plants will balance their raw material inventory to minimize the overall freight cost. The impact of carbon futures base on shipping is asymmetric. This research fills in the research gap of indirect impact of ETS on shipping. It optimizes the production plan of steel industry when there is carbon futures market. It also provides a reference for shipping companies to adjust shipping capacity based on carbon futures in the short term.