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Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals


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  • Aatola, Piia
  • Ollikainen, Markku
  • Toppinen, Anne


We investigate the price determination of the European Union emission allowance (EUA) of the European Union emissions trading scheme (EU ETS). We postulate an uncertain permit price and risk-averse firms which have the possibility to hedge in the forward market. The firms produce final goods, abate their emissions and trade permits in the permit market. The dependence of the equilibrium permit price on exogenous variables is studied in a permit market model. We test our theoretical findings with empirical data from 2005 to 2010 in the EU ETS market. We use daily forward prices of EUA as our dependent variable. We use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals, such as German electricity prices and gas and coal prices, with the price of EUA. We find that the EUA forward price depends on fundamentals, especially on the price of electricity as well as on the gas–coal difference, in a statistically significant way.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 36 (2013)
Issue (Month): C ()
Pages: 380-395

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Handle: RePEc:eee:eneeco:v:36:y:2013:i:c:p:380-395

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Keywords: European Union emissions trading; Permit price; Risk; Econometric analysis;

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Cited by:
  1. Harrison Fell & Beat Hintermann & Herman Vollebergh, 2013. "Carbon content of electricity futures in Phase II of the EU ETS," Working Papers 2013-06, Colorado School of Mines, Division of Economics and Business.
  2. Lutz, Benjamin Johannes & Pigorsch, Uta & Rotfuß, Waldemar, 2013. "Nonlinearity in cap-and-trade systems: The EUA price and its fundamentals," Energy Economics, Elsevier, vol. 40(C), pages 222-232.
  3. Rita Sousa & Luís Aguiar-Conraria, 2014. "Dynamics of CO2 price drivers," NIPE Working Papers 02/2014, NIPE - Universidade do Minho.
  4. Rita Sousa & Luís Aguiar-Conraria & Maria Joana Soares, 2014. "Carbon Financial Markets: a time-frequency analysis of CO2 price drivers," NIPE Working Papers 03/2014, NIPE - Universidade do Minho.


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