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Banking and Borrowing in the EU ETS: An Econometric Appraisal of the 2005-2007 Intertemporal Market

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  • Julien Chevallier

    ()
    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

  • Emilie Alberola

    (Mission Climat Caisse des Dépôts - Université Panthéon-Sorbonne - Paris I)

Abstract

This article critically examines the EU ETS intertemporal market during its Phase I (2005-2007). We test the Hotelling rule as a key element of a competitive equilibrium to validate whether allowance prices rise at the same rate as the interest rate. Including readily observable characteristics of the EU ETS such as the presence of one endogenous structural break and the influence of other energy markets shocks, we argue the inter-period ban on banking undermines the ability of the EU ETS to provide efficient price signalling. We also find a significant relationship between allowance price changes and the expected scarcity of allowances approximated by the Ellerman-Parsons ratio. Finally, our results show evidence of institutional learning by market participants.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00388071.

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Date of creation: 26 May 2009
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Handle: RePEc:hal:wpaper:halshs-00388071

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Related research

Keywords: Emissions trading; Banking; EU ETS; Hotelling rule; Ellerman-Parsons Ratio;

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References

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  1. Schleich, Joachim & Ehrhart, Karl-Martin & Hoppe, Christian & Seifert, Stefan, 2006. "Banning banking in EU emissions trading?," Energy Policy, Elsevier, Elsevier, vol. 34(1), pages 112-120, January.
  2. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  3. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers, Princeton, Department of Economics - Econometric Research Program 338, Princeton, Department of Economics - Econometric Research Program.
  4. Pindyck, Robert S., 1991. "The present value model of rational commodity pricing," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3354-91., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521660839.
  6. Tobias Kronenberg, 2008. "Should We Worry About The Failure Of The Hotelling Rule?," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 22(4), pages 774-793, 09.
  7. Junsoo Lee & Mark Strazicich, 2001. "Testing the null of stationarity in the presence of a structural break," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(6), pages 377-382.
  8. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, Springer, vol. 29(3), pages 283-302, 05.
  9. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
  10. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, Elsevier, vol. 64(1), pages 101-115, April.
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Cited by:
  1. Leon Vinokur, 2009. "Disposition in the Carbon Market and Institutional Constraints," Working Papers, Queen Mary, University of London, School of Economics and Finance 652, Queen Mary, University of London, School of Economics and Finance.
  2. Rittler, Daniel, 2009. "Price Discovery, Causality and Volatility Spillovers in European Union Allowances Phase II: A High Frequency Analysis," Working Papers 0492, University of Heidelberg, Department of Economics.
  3. Georg Grüll & Luca Taschini, 2010. "A comparison of reduced-form permit price models and their empirical performances," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 33, Grantham Research Institute on Climate Change and the Environment.

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