Allowance price drivers in the first phase of the EU ETS
AbstractIn the first phase of the EU Emissions Trading Scheme (EU ETS), the price per ton of CO2 initially rose to over [euro]30; the price then collapsed to essentially zero by mid 2007. By deriving a structural model of the allowance price under the assumption of efficient markets I examine the extent to which this variation in price can be explained by marginal abatement costs. I then gradually relax the model by allowing for delayed adjustment of price to fundamentals, as well as by introducing lagged LHS variables. The pattern of results suggests that while prices were not initially driven by marginal abatement costs, this inefficiency was largely corrected after the accounting of 2005 emissions in April 2006.
Download InfoIf 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.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Environmental Economics and Management.
Volume (Year): 59 (2010)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622870
Emissions permit markets Air pollution Climate change Bubble Speculation CO2 Asset pricing EU ETS;
Other versions of this item:
- Beat Hintermann, 2009. "Allowance Price Drivers in the First Phase of the EU ETS," CEPE Working paper series 09-63, CEPE Center for Energy Policy and Economics, ETH Zurich.
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
- Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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.:
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Camerer, Colin, 1989. " Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
- Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
- Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
- Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
- Reshmaan N. Hussam & David Porter & Vernon L. Smith, 2008. "Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?," American Economic Review, American Economic Association, vol. 98(3), pages 924-37, June.
- Marc Chesney & Luca Taschini, 2008. "The Endogenous Price Dynamics of the Emission Allowances: An Application to CO2 Option Pricing," Swiss Finance Institute Research Paper Series 08-01, Swiss Finance Institute, revised Jan 2008.
- Hepburn, C. & Grubb, M. & Neuhoff, K. & Matthes , F. & Tse, M., 2006. "Auctioning of EU ETS Phase II allowances: how and why?," Cambridge Working Papers in Economics 0644, Faculty of Economics, University of Cambridge.
- Marco Cipriani & Antonio Guarino, 2009.
"Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals,"
Journal of the European Economic Association,
MIT Press, vol. 7(1), pages 206-233, 03.
- Antonio Guarino & Marco Cipriani, 2008. "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals," WEF Working Papers 0047, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
- Marco Cipriani & Antonio Guarino, 2008. "Herd Behavior in Financial Markets: An Experiment with Financial Market Professionals," Working Papers 2009-16, The George Washington University, Institute for International Economic Policy.
- Huntley Schaller & Simon Van Norden, 1997.
"Regime switching in stock market returns,"
Applied Financial Economics,
Taylor & Francis Journals, vol. 7(2), pages 177-191.
- Bohringer, Christoph & Lange, Andreas, 2005.
"On the design of optimal grandfathering schemes for emission allowances,"
European Economic Review,
Elsevier, vol. 49(8), pages 2041-2055, November.
- Böhringer, Christoph & Lange, Andreas, 2003. "On the Design of Optimal Grandfathering Schemes for Emission Allowances," ZEW Discussion Papers 03-08, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
- Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
- Pizer, William & Kruger, Joseph, 2004. "The EU Emissions Trading Directive: Opportunities and Potential Pitfalls," Discussion Papers dp-04-24, Resources For the Future.
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
- Friedman, Daniel & Aoki, Masanao, 1992. "Inefficient Information Aggregation as a," Bulletin of Economic Research, Wiley Blackwell, vol. 44(4), pages 251-79, October.
- Refet Gurkaynak, 2005.
"Econometric Tests of Asset Price Bubbles: Taking Stock,"
- Refet S. Gürkaynak, 2005. "Econometric tests of asset price bubbles: taking stock," Finance and Economics Discussion Series 2005-04, Board of Governors of the Federal Reserve System (U.S.).
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
- Muller, Adrian & Sterner, Thomas, 2009.
"Output and Abatement Effects of Allocation Readjustment in Permit Trade,"
Working Papers in Economics
413, University of Gothenburg, Department of Economics.
- Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers dp-06-49, Resources For the Future.
- Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
- Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
- Grubb, M. & Neuhoff, K., 2006. "Allocation and competitiveness in the EU emissions trading scheme: policy overview," Cambridge Working Papers in Economics 0645, Faculty of Economics, University of Cambridge.
- Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
- Hahn, Robert W., 1982.
"Market Power and Transferable Property Rights,"
402, California Institute of Technology, Division of the Humanities and Social Sciences.
- Chang-Jin Kim & Jeremy M. Piger & Richard Startz, 2004.
"Estimation of Markov regime-switching regression models with endogenous switching,"
2003-015, Federal Reserve Bank of St. Louis.
- Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
- Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
- A. Ellerman & Barbara Buchner, 2008. "Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(2), pages 267-287, October.
- Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
- Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
- Neuhoff, K. & Keats, K. & Sato, M., 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Cambridge Working Papers in Economics 0642, Faculty of Economics, University of Cambridge.
- Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
- Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral 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 references are entirely missing, you can add them using this form.