A model of carbon price interactions with macroeconomic and energy dynamics
AbstractThis paper develops a model of carbon pricing by considering two fundamental drivers of European Union Allowances: economic activity and energy prices. On the one hand, economic activity is proxied by aggregated industrial production in the EU 27 (as it provides the best performance in a preliminary forecasting exercise vs. other indicators). On the other hand, brent, natural gas and coal prices are selected as being the main carbon price drivers (as highlighted by previous literature). The interactions between the macroeconomic and energy spheres are captured in a Markov-switching VAR model with two states that is able to reproduce the ‘boom–bust’ business cycle (Hamilton (1989)). First, industrial production is found to impact positively (negatively) the carbon market during periods of economic expansion (recession), thereby confirming the existence of a link between the macroeconomy and the price of carbon. Second, the brent price is confirmed to be the leader in price formation among energy markets (Bachmeier and Griffin (2006)), as it impacts other variables through the structure of the Markov-switching model. Taken together, these results uncover new interactions between the recently created EU emissions market and the pre-existing macroeconomic/energy environment.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 33 (2011)
Issue (Month): 6 ()
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Web page: http://www.elsevier.com/locate/eneco
Carbon price; Economic activity; Energy prices; Markov-switching model;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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- Wilfried Rickels & Dennis Görlich & Gerrit Oberst & Sonja Peterson, 2012. "Carbon Price Dynamics – Evidence from Phase II of the European Emission Trading Scheme," Kiel Working Papers 1804, Kiel Institute for the World Economy.
- Oscar Carchano & Vicente Medina Martínez & Ángel Pardo Tornero, 2012. "Rolling over EUAs and CERs," Working Papers. Serie AD 2012-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Harrison Fell & Beat Hintermann & Herman R. J. Vollebergh, 2013. "Carbon Content of Electricity Futures in Phase II of the EU ETS," CESifo Working Paper Series 4367, CESifo Group Munich.
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