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Is carbon emissions trading profitable?

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  • Narayan, Paresh Kumar
  • Sharma, Susan Sunila

Abstract

The European Carbon Emissions Trading Scheme introduced in 2005 has led to both spot and futures market trading of carbon emissions. However, despite seven years of trading, we have no knowledge on how profitable carbon emissions trading is. In this paper, we first test whether carbon forward returns predict carbon spot returns. We find strong evidence on both in-sample and out-of-sample predictability. Based on this evidence, we forecast carbon spot returns using both carbon forward returns and a constant. We consider a mean-variance investor and a CRRA investor, and show that they have higher utility and can make more statistically significant profits by following forecasts generated from the forward returns model than from a constant returns model.

Suggested Citation

  • Narayan, Paresh Kumar & Sharma, Susan Sunila, 2015. "Is carbon emissions trading profitable?," Economic Modelling, Elsevier, vol. 47(C), pages 84-92.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:84-92
    DOI: 10.1016/j.econmod.2015.01.001
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    4. Fortune Ganda & Khazamula Samson Milondzo, 2018. "The Impact of Carbon Emissions on Corporate Financial Performance: Evidence from the South African Firms," Sustainability, MDPI, vol. 10(7), pages 1-22, July.
    5. Rannou, Yves, 2019. "Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures," Economic Modelling, Elsevier, vol. 81(C), pages 387-410.
    6. Sharma, Susan Sunila, 2016. "Can consumer price index predict gold price returns?," Economic Modelling, Elsevier, vol. 55(C), pages 269-278.
    7. Liu, Jing-Yue & Zhang, Yue-Jun, 2021. "Has carbon emissions trading system promoted non-fossil energy development in China?," Applied Energy, Elsevier, vol. 302(C).
    8. El-Shazly, Alaa, 2016. "Structural breaks and monetary dynamics: A time series analysis," Economic Modelling, Elsevier, vol. 53(C), pages 133-143.
    9. Xiangsheng Dou, 2017. "Low Carbon Technology Innovation, Carbon Emissions Trading and Relevant Policy Support for China s Low Carbon Economy Development," International Journal of Energy Economics and Policy, Econjournals, vol. 7(2), pages 172-184.
    10. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    11. Adediran, Idris A. & Swaray, Raymond, 2023. "Carbon trading amidst global uncertainty: The role of policy and geopolitical uncertainty," Economic Modelling, Elsevier, vol. 123(C).
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    13. Dutta, Anupam & Bouri, Elie & Noor, Md Hasib, 2018. "Return and volatility linkages between CO2 emission and clean energy stock prices," Energy, Elsevier, vol. 164(C), pages 803-810.
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    15. Liu, Xiaojia & An, Haizhong & Wang, Lijun & Jia, Xiaoliang, 2017. "An integrated approach to optimize moving average rules in the EUA futures market based on particle swarm optimization and genetic algorithms," Applied Energy, Elsevier, vol. 185(P2), pages 1778-1787.
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    17. Weng, Qingqing & Xu, He, 2018. "A review of China’s carbon trading market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 91(C), pages 613-619.
    18. Dinh Hoang Bach Phan & Thi Thao Nguyen Nguyen & Dat Thanh Nguyen, 2019. "A Study Of Indonesia’S Stock Market: How Predictable Is It?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 0(12th BMEB), pages 1-12, January.
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    22. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
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