An emerging equilibrium in the EU emissions trading scheme
The European Union's Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, economic growth, energy prices and weather conditions determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Benz, Eva & Trück, Stefan, 2009. "Modeling the price dynamics of CO2 emission allowances," Energy Economics, Elsevier, vol. 31(1), pages 4-15, January.
- Brian Jacobsen, 2008. "Demonstrating error-correction modelling for intraday statistical arbitrage," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(4), pages 287-292.
- 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.
- Pan, Ming-Shiun & Liu, Y. Angela & Roth, Herbert J., 1999. "Common stochastic trends and volatility in Asian-Pacific equity markets," Global Finance Journal, Elsevier, vol. 10(2), pages 161-172.
- Lee, Tae-Hwy & Tse, Yiuman, 1996. "Cointegration tests with conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 73(2), pages 401-410, August.
- Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
- Jean-Marc Burniaux, 2000. "A Multi-Gas Assessment of the Kyoto Protocol," OECD Economics Department Working Papers 270, OECD Publishing.
- Considine, Timothy J., 2000. "The impacts of weather variations on energy demand and carbon emissions," Resource and Energy Economics, Elsevier, vol. 22(4), pages 295-314, October.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Davis, W. Bart & Sanstad, Alan H. & Koomey, Jonathan G., 2003. "Contributions of weather and fuel mix to recent declines in US energy and carbon intensity," Energy Economics, Elsevier, vol. 25(4), pages 375-396, July.
- Rune Höglund & Ralf Östermark, 2003. "Size and power of some cointegration tests under structural breaks and heteroskedastic noise," Statistical Papers, Springer, vol. 44(1), pages 1-22, January.
- Gannon, Gerard L., 1996. "First and second order inefficiency in Australasian currency markets," Pacific-Basin Finance Journal, Elsevier, vol. 4(2-3), pages 315-327, July.
- 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.
- Junsoo Lee & Mark C. Strazicich, 2013.
"Minimum LM unit root test with one structural break,"
AccessEcon, vol. 33(4), pages 2483-2492.
- Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
- Daskalakis, George & Psychoyios, Dimitris & Markellos, Raphael N., 2009. "Modeling CO2 emission allowance prices and derivatives: Evidence from the European trading scheme," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1230-1241, July.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Maria Mansanet-Bataller & Ángel Pardo, 2008. "What You Should Know About Carbon Markets," Energies, MDPI, Open Access Journal, vol. 1(3), pages 120-153, December.
- Moral-Carcedo, Julian & Vicens-Otero, Jose, 2005. "Modelling the non-linear response of Spanish electricity demand to temperature variations," Energy Economics, Elsevier, vol. 27(3), pages 477-494, May.
- Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
- Alexakis, Panayotis & Apergis, Nicholas, 1996. "ARCH effects and cointegration: Is the foreign exchange market efficient?," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 687-697, May.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:33:y:2011:i:2:p:353-362. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.