Modelling Correlation in Carbon and Energy Markets
AbstractThe paper examines correlations between daily returns of month-ahead baseload electricity, fuel input and carbon emission allowance (EU-ETS) prices for Great Britain. The perspective of a CCGT plant operator is assumed, producing baseload electricity with natural gas and emission allowances and selling output forward in the month-ahead market. Price correlation between power, natural gas and emission allowances as well as their dynamic behaviour is essential for the extent to which cashflows from CCGT plants are self-hedged. Switching between input fuels with different carbon intensities is taken as the fundamental driver of this correlation. Relative marginal power generation costs are used to construct carbon price regimes during which no switching takes place. The regimes are then used as explanatory variables in a dynamic conditional correlation model. Using daily observations of month-ahead prices from April 2005 to August 2010, the results suggest that extreme weather, high commodity market volatility and seasons have no effect on correlation. However, there is evidence of significant price decoupling during periods of extreme relative carbon, coal and natural gas prices.
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 InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1123.
Date of creation: 10 Feb 2011
Date of revision:
Contact details of provider:
Web page: http://www.econ.cam.ac.uk/index.htm
EU-ETS; Natural Gas; Fuel-Switching; Dynamic Conditional Correlation;
Find related papers by JEL classification:
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-04 (All new papers)
- NEP-ENE-2011-06-04 (Energy Economics)
- NEP-ENV-2011-06-04 (Environmental Economics)
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.:
- BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen VK, .
"Multivariate GARCH models: a survey,"
CORE Discussion Papers RP
-1847, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Emilie Alberola & Julien Pierre Chevallier, 2007.
"European carbon prices and banking restrictions: evidence from phase I (2005-2007),"
EconomiX Working Papers
2007-32, University of Paris West - Nanterre la Défense, EconomiX.
- Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
- Yihsu Chen & Jos Sijm & Benjamin Hobbs & Wietze Lise, 2008. "Implications of CO 2 emissions trading for short-run electricity market outcomes in northwest Europe," Journal of Regulatory Economics, Springer, vol. 34(3), pages 251-281, December.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Williams,Jeffrey C. & Wright,Brian D., 1991.
"Storage and Commodity Markets,"
Cambridge University Press, number 9780521326162, April.
- Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
- Klepper, Gernot & Peterson, Sonja, 2006.
"Marginal abatement cost curves in general equilibrium: The influence of world energy prices,"
Resource and Energy Economics,
Elsevier, vol. 28(1), pages 1-23, January.
- Klepper, Gernot & Peterson, Sonja, 2006. "Marginal abatement cost curves in general equilibrium: The influence of world energy prices," Open Access Publications from Kiel Institute for the World Economy 3775, Kiel Institute for the World Economy (IfW).
- Gernot Klepper & Sonja Peterson, 2004. "Marginal Abatement Cost Curves in General Equilibrium: The Influence of World Energy Prices," Working Papers 2004.136, Fondazione Eni Enrico Mattei.
- Chevallier, Julien, 2009.
"Carbon futures and macroeconomic risk factors: A view from the EU ETS,"
Elsevier, vol. 31(4), pages 614-625, July.
- Chevallier, Julien, 2009. "Carbon futures and macroeconomic risk factors : a view from the EU ETS," Economics Papers from University Paris Dauphine 123456789/4210, Paris Dauphine University.
- Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003.
"Asymmetric dynamics in the correlations of global equity and bond returns,"
Working Paper Series
0204, European Central Bank.
- Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
- Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
- Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
- Annastiina Silvennoinen & Timo Teräsvirta, 2008.
"Multivariate GARCH models,"
CREATES Research Papers
2008-06, School of Economics and Management, University of Aarhus.
- 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.
- Vargas, Gregorio A., 2008. "What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns?," MPRA Paper 7174, University Library of Munich, Germany.
- Jurgen Doornik & Marius Ooms, 2005.
"Outlier Detection in GARCH Models,"
Economics Series Working Papers
2005-W24, University of Oxford, Department of Economics.
- Jurgen A. Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Tinbergen Institute Discussion Papers 05-092/4, Tinbergen Institute.
- Jurgen A. Doornik & Marius Ooms, 2005. "Outlier Detection in GARCH Models," Economics Papers 2005-W24, Economics Group, Nuffield College, University of Oxford.
- Georg Zachmann, 2007. "A Markov Switching Model of the Merit Order to Compare British and German Price Formation," Discussion Papers of DIW Berlin 714, DIW Berlin, German Institute for Economic Research.
- Mills,Terence C. & Markellos,Raphael N., 2008. "The Econometric Modelling of Financial Time Series," Cambridge Books, Cambridge University Press, number 9780521710091, April.
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Suzette P. Galinato & Jonathan K. Yoder & David Granatstein, 2010.
"The Economic Value of Biochar in Crop Production and Carbon Sequestration,"
2010-3, School of Economic Sciences, Washington State University.
- Galinato, Suzette P. & Yoder, Jonathan K. & Granatstein, David, 2011. "The economic value of biochar in crop production and carbon sequestration," Energy Policy, Elsevier, vol. 39(10), pages 6344-6350, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb).
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.