Advanced Search
MyIDEAS: Login to save this article or follow this journal

The role of regulatory uncertainty in certificate markets: A case study of the Swedish/Norwegian market

Contents:

Author Info

  • Fagiani, Riccardo
  • Hakvoort, Rudi
Registered author(s):

    Abstract

    Price volatility in green certificate markets reflects uncertainty over future prices, representing a major source of risk for renewable energy generators. Price risk is considered the principal deficiency of this market-based policy since it causes investors to require higher returns. Moreover, investors are exposed to regulatory risk; namely, the risk that a change in the regulation will materially impact the certificate price. Regulatory uncertainty is reflected in market volatility exacerbating certificate price risk. Using an econometric approach, we investigate the role of regulatory changes on price volatility in the Swedish certificate market. The results of our analysis indicate that regulatory changes strongly affect certificate markets, resulting in periods of higher volatility. Moreover, we analyze whether certificate price volatility has changed after creating a joint Swedish/Norwegian market. Results indicate that the ambivalence surrounding the creation of this bigger market led to a period of increased price volatility between 2010 and 2011. Overall, this article brings a better understanding of the role of regulatory uncertainty on certificate markets, and gives evidence for its negative impact in terms of increased price volatility.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0301421513010999
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 65 (2014)
    Issue (Month): C ()
    Pages: 608-618

    as in new window
    Handle: RePEc:eee:enepol:v:65:y:2014:i:c:p:608-618

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/enpol

    Related research

    Keywords: Green certificate markets; Regulatory uncertainty; Price volatility;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Bergek, Anna & Jacobsson, Staffan, 2010. "Are tradable green certificates a cost-efficient policy driving technical change or a rent-generating machine? Lessons from Sweden 2003-2008," Energy Policy, Elsevier, Elsevier, vol. 38(3), pages 1255-1271, March.
    2. Brown, William Jr. & Burdekin, Richard C.K. & Weidenmier, Marc D., 2006. "Volatility in an era of reduced uncertainty: Lessons from Pax Britannica," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(3), pages 693-707, March.
    3. He, Yanan & Wang, Shouyang & Lai, Kin Keung, 2010. "Global economic activity and crude oil prices: A cointegration analysis," Energy Economics, Elsevier, Elsevier, vol. 32(4), pages 868-876, July.
    4. Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, Elsevier, vol. 28(4), pages 467-488, July.
    5. Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, Elsevier, vol. 31(1), pages 4-15, January.
    6. Mitchell, C. & Bauknecht, D. & Connor, P.M., 2006. "Effectiveness through risk reduction: a comparison of the renewable obligation in England and Wales and the feed-in system in Germany," Energy Policy, Elsevier, Elsevier, vol. 34(3), pages 297-305, February.
    7. Schwert, G William, 1990. "Stock Volatility and the Crash of '87," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(1), pages 77-102.
    8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
    9. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 5-59.
    10. Julien Chevallier & Yannick Le Pen & Benoît Sévi, 2011. "Options introduction and volatility in the EU ETS," Working Papers 1107, Chaire Economie du Climat.
    11. Oberndorfer, Ulrich, 2009. "EU Emission Allowances and the stock market: Evidence from the electricity industry," Ecological Economics, Elsevier, vol. 68(4), pages 1116-1126, February.
    12. Kenneth D. West & Dongchul Cho, 1994. "The Predictive Ability of Several Models of Exchange Rate Volatility," NBER Technical Working Papers 0152, National Bureau of Economic Research, Inc.
    13. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(1), pages 83-106, June.
    14. Jurgen A. Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Tinbergen Institute Discussion Papers 05-092/4, Tinbergen Institute.
    15. Eirik S. Amundsen and Lars Bergman, 2012. "Green Certificates and Market Power on the Nordic Power Market," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 2).
    16. Eirik S. Amundsen & Fridrik M. Baldursson & Jørgen Birk Mortensen, 2005. "Price Volatility and Banking in Green Certificate Markets," Discussion Papers 05-08, University of Copenhagen. Department of Economics.
    17. del Rio, Pablo, 2005. "A European-wide harmonised tradable green certificate scheme for renewable electricity: is it really so beneficial?," Energy Policy, Elsevier, Elsevier, vol. 33(10), pages 1239-1250, July.
    18. Michael McKenzie & Heather Mitchell, 2002. "Generalized asymmetric power ARCH modelling of exchange rate volatility," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(8), pages 555-564.
    19. Kildegaard, Arne, 2008. "Green certificate markets, the risk of over-investment, and the role of long-term contracts," Energy Policy, Elsevier, Elsevier, vol. 36(9), pages 3413-3421, September.
    20. repec:dgr:uvatin:2005092 is not listed on IDEAS
    21. Fagiani, Riccardo & Barquín, Julián & Hakvoort, Rudi, 2013. "Risk-based assessment of the cost-efficiency and the effectivity of renewable energy support schemes: Certificate markets versus feed-in tariffs," Energy Policy, Elsevier, Elsevier, vol. 55(C), pages 648-661.
    22. Newey, W.K. & West, K.D., 1992. "Automatic Lag Selection in Covariance Matrix Estimation," Working papers, Wisconsin Madison - Social Systems 9220, Wisconsin Madison - Social Systems.
    23. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, Elsevier, vol. 36(2), pages 787-797, February.
    24. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, Elsevier, vol. 34(1), pages 327-334.
    25. Bredin, Don & Muckley, Cal, 2011. "An emerging equilibrium in the EU emissions trading scheme," Energy Economics, Elsevier, Elsevier, vol. 33(2), pages 353-362, March.
    26. Morthorst, P. E., 2000. "The development of a green certificate market," Energy Policy, Elsevier, Elsevier, vol. 28(15), pages 1085-1094, December.
    27. Alberola, Emilie & Chevallier, Julien & Chèze, Benoît, 2008. "Price drivers and structural breaks in European carbon prices 2005-07," Economics Papers from University Paris Dauphine 123456789/4222, Paris Dauphine University.
    28. David E. Rapach & Jack K. Strauss, 2008. "Structural breaks and GARCH models of exchange rate volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(1), pages 65-90.
    29. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
    30. Agnolucci, Paolo, 2007. "The effect of financial constraints, technological progress and long-term contracts on tradable green certificates," Energy Policy, Elsevier, Elsevier, vol. 35(6), pages 3347-3359, June.
    31. Paolella, Marc S. & Taschini, Luca, 2008. "An econometric analysis of emission allowance prices," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(10), pages 2022-2032, October.
    32. Dinica, Valentina, 2006. "Support systems for the diffusion of renewable energy technologies--an investor perspective," Energy Policy, Elsevier, Elsevier, vol. 34(4), pages 461-480, March.
    33. Brailsford, Timothy J. & Faff, Robert W., 1996. "An evaluation of volatility forecasting techniques," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(3), pages 419-438, April.
    34. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    35. Gross, Robert & Blyth, William & Heptonstall, Philip, 2010. "Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs," Energy Economics, Elsevier, Elsevier, vol. 32(4), pages 796-804, July.
    36. Bradley T. Ewing & Farooq Malik, 2010. "Estimating Volatility Persistence in Oil Prices Under Structural Breaks," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 45(4), pages 1011-1023, November.
    37. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
    38. Ford, Andrew & Vogstad, Klaus & Flynn, Hilary, 2007. "Simulating price patterns for tradable green certificates to promote electricity generation from wind," Energy Policy, Elsevier, Elsevier, vol. 35(1), pages 91-111, January.
    39. Chen, Sheng-Tung & Kuo, Hsiao-I & Chen, Chi-Chung, 2007. "The relationship between GDP and electricity consumption in 10 Asian countries," Energy Policy, Elsevier, Elsevier, vol. 35(4), pages 2611-2621, April.
    40. Amundsen, Eirik S. & Nese, Gjermund, 2009. "Integration of tradable green certificate markets: What can be expected?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(6), pages 903-922, November.
    41. Menanteau, Philippe & Finon, Dominique & Lamy, Marie-Laure, 2003. "Prices versus quantities: choosing policies for promoting the development of renewable energy," Energy Policy, Elsevier, Elsevier, vol. 31(8), pages 799-812, June.
    42. Klessmann, Corinna & Nabe, Christian & Burges, Karsten, 2008. "Pros and cons of exposing renewables to electricity market risks--A comparison of the market integration approaches in Germany, Spain, and the UK," Energy Policy, Elsevier, Elsevier, vol. 36(10), pages 3646-3661, October.
    43. Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(2), pages 395-422.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Fagiani, Riccardo & Richstein, Jörn C. & Hakvoort, Rudi & De Vries, Laurens, 2014. "The dynamic impact of carbon reduction and renewable support policies on the electricity sector," Utilities Policy, Elsevier, Elsevier, vol. 28(C), pages 28-41.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:enepol:v:65:y:2014:i:c:p:608-618. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.