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An investigation into the evolved relationship between spot and futures in the European Union Emission Trading Scheme

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  • Wei Lu
  • Wen-Jun Wang

Abstract

This paper fills the gap in the literature that the functions of the European Union Allowance (EUA) futures have only been studied in the pilot phase of the European Union Emission Trading Scheme (EU ETS) and no market evolvement has been explored. The cost-of-carry pricing efficiency of the EUA futures and information spillover between the EUA spot market and futures market are examined in Phase I (2005-2007) and Phase II (2008-2012), respectively. First, it was found that only the December 2007 futures price was in long-run equilibrium with the spot price, but the relationship was not given by a cost-of-carry model. Second, the information spillover pattern also changed from Phase I to Phase II. The leading role of futures contract in price discovery can only be seen in Phase I, but not in Phase II. We conclude that, in the second phase of EU ETS, the market fundamentals are imposing stronger impacts on EUA price formation while the impact from speculation has weakened significantly.

Suggested Citation

  • Wei Lu & Wen-Jun Wang, 2011. "An investigation into the evolved relationship between spot and futures in the European Union Emission Trading Scheme," International Journal of Green Economics, Inderscience Enterprises Ltd, vol. 5(2), pages 133-142.
    • Handle: RePEc:ids:ijgrec:v:5:y:2011:i:2:p:133-142
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