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EUA and sCER Phase II Price Drivers: Unveiling the reasons for the existence of the EUA-sCER spread

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  • Hervé-Mignucci, Morgan
  • Mansanet-Bataller, Maria
  • Chevallier, Julien
  • Alberola, Emilie

Abstract

This article studies the price relationships between EU emissions allowances (EUAs) - valid under the EU Emissions Trading Scheme (EU ETS) - and secondary Certified Emissions Reductions (sCERs) - established from primary CERs generated through the Kyoto Protocol's Clean Development Mechanism (CDM). Given the price differences between EUAs and sCERs, financial and industrial operators may benefit from arbitrage strategies by buying sCERs and selling EUAs (i.e. selling the EUAsCER spread) to cover their compliance position as industrial operators are allowed to use sCERs towards compliance with their emissions cap within the European system up to 13.4%. Our central results show that the spread is mainly driven by EUA prices and market microstructure variables and less importantly, as we would expect, by emissions-related fundamental drivers. This might be justified by the fact that the EU ETS remains the greatest source of CER demand to date.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5109.

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Date of creation: 2011
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Publication status: Published in Energy Policy, 2011, Vol. 39, no. 3. pp. 1056-1069.Length: 13 pages
Handle: RePEc:dau:papers:123456789/5109

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Keywords: Emissions Markets; Arbitrage; EUA-sCER Spread;

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Citations

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Cited by:
  1. Vicente Medina & Angel Pardo & Roberto Pascual, 2013. "Carbon Credits: Who is the Leader of the Pack?," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 210-220.
  2. Schultz, Emma & Swieringa, John, 2014. "Catalysts for price discovery in the European Union Emissions Trading System," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 112-122.
  3. Rita Sousa & Luís Aguiar-Conraria, 2014. "Dynamics of CO2 price drivers," NIPE Working Papers 02/2014, NIPE - Universidade do Minho.
  4. Chevallier, Julien, 2013. "Variance risk-premia in CO2 markets," Economic Modelling, Elsevier, vol. 31(C), pages 598-605.
  5. Byun, Suk Joon & Cho, Hangjun, 2013. "Forecasting carbon futures volatility using GARCH models with energy volatilities," Energy Economics, Elsevier, vol. 40(C), pages 207-221.
  6. Mizrach, Bruce, 2012. "Integration of the global carbon markets," Energy Economics, Elsevier, vol. 34(1), pages 335-349.
  7. Nazifi, Fatemeh, 2013. "Modelling the price spread between EUA and CER carbon prices," Energy Policy, Elsevier, vol. 56(C), pages 434-445.
  8. Chevallier, Julien, 2012. "EUAs and CERs : Interactions in a Markov regime-switching environment," Economics Papers from University Paris Dauphine 123456789/7938, Paris Dauphine University.
  9. Chevallier, Julien, 2011. "Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models," Economics Papers from University Paris Dauphine 123456789/6970, Paris Dauphine University.
  10. Medina, Vicente & Pardo, Ángel & Pascual, Roberto, 2014. "The timeline of trading frictions in the European carbon market," Energy Economics, Elsevier, vol. 42(C), pages 378-394.
  11. Chevallier, Julien, 2011. "A model of carbon price interactions with macroeconomic and energy dynamics," Economics Papers from University Paris Dauphine 123456789/6969, Paris Dauphine University.

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