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An emerging equilibrium in the EU emissions trading scheme

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  • Bredin, Don
  • Muckley, Cal

Abstract

The European Union's Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, economic growth, energy prices and weather conditions determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 2 (March)
Pages: 353-362

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:2:p:353-362

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: CO2 prices Energy EU ETS Kyoto Protocol Weather;

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References

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Citations

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Cited by:
  1. Gary Koop & Lise Tole, 2011. "Forecasting the European Carbon Market," Working Papers 1110, University of Strathclyde Business School, Department of Economics.
  2. Anna Creti & Pierre-André Jouvet & Valérie Mignon, 2011. "Carbon Price Drivers: Phase I versus Phase II Equilibrium?," Working Papers 1106, Chaire Economie du Climat.
  3. Aleksandar Zaklan, 2013. "Why Do Emitters Trade Carbon Permits?: Firm-Level Evidence from the European Emission Trading Scheme," Discussion Papers of DIW Berlin 1275, DIW Berlin, German Institute for Economic Research.

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