IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v124y2023ics0140988323002359.html

The role of fundamentals and policy in New Zealand's carbon prices

Author

Listed:
  • Liao, Ling
  • Diaz-Rainey, Ivan
  • Kuruppuarachchi, Duminda
  • Gehricke, Sebastian

Abstract

The New Zealand Emission Trading Scheme (NZ ETS) is unique in that it includes forestry as a carbon sink (a source of unit supply). Further, the NZ ETS has been subject to many policy changes including a switch from allowing unlimited importation of units to becoming completely autarkic. In this context, we analyse the pricing dynamics for New Zealand Units (NZUs) driven by the interaction between allowances supply and demand between 2010 and 2019 and for two sets of subperiods divided by the official and actual de-link dates. Our empirical models find that international offsets negatively affected NZU returns before the actual de-link date, domestic supply after the official de-link date, and banked units between the official and actual de-link dates, and that green (mainly forestry) offsets, surprisingly, positively affected NZU returns before the actual de-link date. Our results also highlight that from a demand perspective, sectoral effects had significant relationships with NZU returns with different dynamics. Namely, manufacturing and construction activities shifted to negatively affect NZU returns after the official de-link date, implying that fixed allocative baselines have resulted in over-allocation over time. Stationary energy sector activities shifted from negatively to positively affecting NZU returns after the official de-link date probably due to their exploitation of unlimited international offset during the linking period.

Suggested Citation

  • Liao, Ling & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda & Gehricke, Sebastian, 2023. "The role of fundamentals and policy in New Zealand's carbon prices," Energy Economics, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002359
    DOI: 10.1016/j.eneco.2023.106737
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988323002359
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2023.106737?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. repec:dau:papers:123456789/6969 is not listed on IDEAS
    3. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    4. repec:dau:papers:123456789/4222 is not listed on IDEAS
    5. 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 Nanterre, EconomiX.
    6. Suzi Kerr & Judd Ormsby & Dominic White, 2021. "Delinking the New Zealand Emissions Trading Scheme from the Kyoto Protocol: comparing theory with practice," Climate Policy, Taylor & Francis Journals, vol. 21(6), pages 792-803, July.
    7. Carver, Thomas & Dawson, Patrick & Kerr, Suzi, 2017. "Including Forestry in an Emissions Trading Scheme: Lessons from New Zealand," Motu Working Papers 290515, Motu Economic and Public Policy Research.
    8. Daniel J. Tulloch & Ivan Diaz-Rainey & I. M. Premachandra, 2020. "Modelling Sector-Level Asset Prices," JRFM, MDPI, vol. 13(6), pages 1-32, June.
    9. Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
    10. Bocklet, Johanna & Hintermayer, Martin & Schmidt, Lukas & Wildgrube, Theresa, 2019. "The reformed EU ETS - Intertemporal emission trading with restricted banking," Energy Economics, Elsevier, vol. 84(C).
    11. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    12. Lin, Boqiang & Wesseh, Presley K., 2020. "On the economics of carbon pricing: Insights from econometric modeling with industry-level data," Energy Economics, Elsevier, vol. 86(C).
    13. Koch, Nicolas & Fuss, Sabine & Grosjean, Godefroy & Edenhofer, Ottmar, 2014. "Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything?—New evidence," Energy Policy, Elsevier, vol. 73(C), pages 676-685.
    14. World Bank, "undated". "State and Trends of Carbon Pricing 2020 [Situación y tendencias de la fijación del precio al carbono 2020]," World Bank Publications - Reports 33809, The World Bank Group.
    15. Huang, Kaixing & Zhao, Hong & Huang, Jikun & Wang, Jinxia & Findlay, Christopher, 2020. "The impact of climate change on the labor allocation: Empirical evidence from China," Journal of Environmental Economics and Management, Elsevier, vol. 104(C).
    16. Benoit Chèze & Julien Chevallier & Nicolas Berghmans & Emilie Alberola, 2019. "On the CO2 emissions determinants during the EU ETS Phases I and II : a plant-level analysis merging the EUTL and Platts power data," Working Papers hal-03190419, HAL.
    17. Leining, Catherine & Ormsby, Judd & Kerr, Suzi, 2017. "Evolution of the New Zealand Emissions Trading Scheme: Linking," Motu Working Papers 290520, Motu Economic and Public Policy Research.
    18. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    19. repec:aen:journl:2006se_weyant-a06 is not listed on IDEAS
    20. Catherine Leining & Suzi Kerr & Bronwyn Bruce-Brand, 2020. "The New Zealand Emissions Trading Scheme: critical review and future outlook for three design innovations," Climate Policy, Taylor & Francis Journals, vol. 20(2), pages 246-264, February.
    21. A. C. Christiansen & A. Arvanitakis & K. Tangen & H. Hasselknippe, 2005. "Price determinants in the EU emissions trading scheme," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 15-30, January.
    22. Van den Bergh, Kenneth & Delarue, Erik & D'haeseleer, William, 2013. "Impact of renewables deployment on the CO2 price and the CO2 emissions in the European electricity sector," Energy Policy, Elsevier, vol. 63(C), pages 1021-1031.
    23. Bevin-McCrimmon, Fergus & Diaz-Rainey, Ivan & McCarten, Matthew & Sise, Greg, 2018. "Liquidity and risk premia in electricity futures," Energy Economics, Elsevier, vol. 75(C), pages 503-517.
    24. Evison, David, 2017. "The New Zealand forestry sector's experience in providing carbon sequestration services under the New Zealand Emissions Trading Scheme, 2008 to 2012," Forest Policy and Economics, Elsevier, vol. 75(C), pages 89-94.
    25. James Tee & Riccardo Scarpa & Dan Marsh & Graeme Guthrie, 2014. "Forest Valuation under the New Zealand Emissions Trading Scheme: A Real Options Binomial Tree with Stochastic Carbon and Timber Prices," Land Economics, University of Wisconsin Press, vol. 90(1), pages 44-60.
    26. Julien Chevallier, 2012. "Banking And Borrowing In The Eu Ets: A Review Of Economic Modelling, Current Provisions And Prospects For Future Design," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 157-176, February.
    27. Johanna Bocklet & Martin Hintermayer & Lukas Schmidt & Theresa Wildgrube, 2019. "The Reformed EU ETS - Intertemporal Emission Trading with Restricted Banking," EWI Working Papers 2019-4, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    28. Ormsby, Judd & Kerr, Suzi, 2016. "The New Zealand Emissions Trading Scheme de-link from Kyoto: impacts on banking and prices," Motu Working Papers 290566, Motu Economic and Public Policy Research.
    29. Zhang, Shengling & Wang, Yao & Hao, Yu & Liu, Zhiwei, 2021. "Shooting two hawks with one arrow: Could China's emission trading scheme promote green development efficiency and regional carbon equality?," Energy Economics, Elsevier, vol. 101(C).
    30. Diaz-Rainey, Ivan & Tulloch, Daniel J., 2018. "Carbon pricing and system linking: Lessons from the New Zealand Emissions Trading Scheme," Energy Economics, Elsevier, vol. 73(C), pages 66-79.
    31. Wen, Fenghua & Zhao, Haocen & Zhao, Lili & Yin, Hua, 2022. "What drive carbon price dynamics in China?," International Review of Financial Analysis, Elsevier, vol. 79(C).
    32. repec:aen:journl:2007v28-03-a05 is not listed on IDEAS
    33. repec:aen:journl:2009v30-03-a03 is not listed on IDEAS
    34. Chen, Yihsu & Tanaka, Makoto, 2018. "Permit banking in emission trading: Competition, arbitrage and linkage," Energy Economics, Elsevier, vol. 71(C), pages 70-82.
    35. Chevallier, Julien, 2011. "A model of carbon price interactions with macroeconomic and energy dynamics," Energy Economics, Elsevier, vol. 33(6), pages 1295-1312.
    36. Jia, Zhijie & Lin, Boqiang, 2022. "CEEEA2.0 model: A dynamic CGE model for energy-environment-economy analysis with available data and code," Energy Economics, Elsevier, vol. 112(C).
    37. Lin, Boqiang & Xu, Bin, 2021. "A non-parametric analysis of the driving factors of China's carbon prices," Energy Economics, Elsevier, vol. 104(C).
    38. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    39. repec:dau:papers:123456789/4611 is not listed on IDEAS
    40. repec:aen:journl:ej41-4-chevallier is not listed on IDEAS
    41. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    42. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    43. Leining, Catherine & Allan, Coey & Kerr, Suzi, 2017. "Evolution of the New Zealand Emissions Trading Scheme: Sectoral Coverage and Point of Obligation," Motu Working Papers 290521, Motu Economic and Public Policy Research.
    44. Guo, Li-Yang & Feng, Chao, 2021. "Are there spillovers among China's pilots for carbon emission allowances trading?," Energy Economics, Elsevier, vol. 103(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dong, Xiyong & Zhang, John F., 2024. "Heterogeneity of regional carbon emission markets in China: Evidence from multidimensional determinants," Energy Economics, Elsevier, vol. 138(C).
    2. Liao, Ling & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda, 2025. "The interplay of carbon offset, renewable energy certificate and electricity markets in Australia," Energy Economics, Elsevier, vol. 144(C).
    3. Wang, Jiqiang & Dai, Peng-Fei & Zhang, Xuewen, 2024. "Untangling the entanglement of US monetary policy uncertainty and European natural gas and carbon prices," Energy Economics, Elsevier, vol. 133(C).
    4. Yan, Zichun & Zhang, Jingjia & Wang, Zehan & Du, Zizhe, 2025. "Does international coordinated industrial policy stimulate regional low-carbon aviation development? Evidence from CORSIA and the APEC developing economies," Energy Economics, Elsevier, vol. 143(C).
    5. Tao, Miaomiao & Poletti, Stephen & Sheng, Mingyue Selena & Wen, Le, 2024. "Nexus between carbon, stock, and energy markets in New Zealand: An analysis of causal domains," Energy, Elsevier, vol. 299(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.
    2. Charles, Amélie & Darné, Olivier & Fouilloux, Jessica, 2011. "Testing the martingale difference hypothesis in CO2 emission allowances," Economic Modelling, Elsevier, vol. 28(1-2), pages 27-35, January.
    3. Amélie Charles & Olivier Darné & Jessica Fouilloux, 2010. "Testing the Martingale Difference Hypothesis in the EU ETS Markets for the CO2 Emission Allowances: Evidence from Phase I and Phase II," Post-Print hal-00797491, HAL.
    4. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2022. "The relationship between carbon-intensive fuel and renewable energy stock prices under the emissions trading system," Energy Economics, Elsevier, vol. 114(C).
    5. Su, Chi Wei & Wei, Shenkai & Wang, Yan & Tao, Ran, 2024. "How does climate policy uncertainty affect the carbon market?," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    6. Chevallier, Julien, 2011. "Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models," Economic Modelling, Elsevier, vol. 28(6), pages 2634-2656.
    7. repec:idn:journl:v:1:y:2019:i:sp1:p:1-26 is not listed on IDEAS
    8. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    9. Joao Leitao & Joaquim Ferreira & Ernesto Santibanez‐Gonzalez, 2021. "Green bonds, sustainable development and environmental policy in the European Union carbon market," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 2077-2090, May.
    10. Zhu, Bangzhu & Ye, Shunxin & Han, Dong & Wang, Ping & He, Kaijian & Wei, Yi-Ming & Xie, Rui, 2019. "A multiscale analysis for carbon price drivers," Energy Economics, Elsevier, vol. 78(C), pages 202-216.
    11. Fields, Micah & Lindequist, David, 2024. "Global spillovers of US climate policy risk: Evidence from EU carbon emissions futures," Energy Economics, Elsevier, vol. 139(C).
    12. 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.
    13. Bernard Njindan Iyke, 2019. "A Test of the Efficiency of the Foreign Exchange Market in Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 21(12th BMEB), pages 439-464, January.
    14. Dai, Xingyu & Xiao, Ling & Wang, Qunwei & Dhesi, Gurjeet, 2021. "Multiscale interplay of higher-order moments between the carbon and energy markets during Phase III of the EU ETS," Energy Policy, Elsevier, vol. 156(C).
    15. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    16. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of US stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 04/13, Instituto Universitario de Análisis Económico y Social.
    17. Huang, Wenyang & Zhao, Jianyu & Wang, Xiaokang, 2024. "Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price," Energy Economics, Elsevier, vol. 132(C).
    18. Chang, Kai & Chen, Rongda & Chevallier, Julien, 2018. "Market fragmentation, liquidity measures and improvement perspectives from China's emissions trading scheme pilots," Energy Economics, Elsevier, vol. 75(C), pages 249-260.
    19. Fang Zhang & Zhengjun Zhang, 2020. "The tail dependence of the carbon markets: The implication of portfolio management," PLOS ONE, Public Library of Science, vol. 15(8), pages 1-17, August.
    20. Esteve, Vicente & Navarro-Ibáñez, Manuel & Prats, María A., 2020. "Stock prices, dividends, and structural changes in the long-term: The case of U.S," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    21. Vicente Esteve & Manuel Navarro-Ibáñez & María A. Prats, 2013. "The present value model of U.S. stock prices revisited: long-run evidence with structural breaks, 1871-2010," Working Papers 1305, Department of Applied Economics II, Universidad de Valencia.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002359. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.