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The timeline of trading frictions in the European carbon market

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  • Medina, Vicente
  • Pardo, Ángel
  • Pascual, Roberto

Abstract

During its trial phase (Phase I), the EU Greenhouse Gas Emission Trading Scheme (EU-ETS) collapsed because of an over-allocation of emission allowances. We evaluate the progress of this market from the trial phase to the next commitment period (Phase II) from a microstructure angle. We show that trading frictions, as measured by the relative spread, information-asymmetry risk, and market-making profits decreased from Phase I to Phase II. Although volatility decreased, its noise-related component gained in importance at the expense of its information-related component, resulting in lower quality of the price changes.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:378-394
    DOI: 10.1016/j.eneco.2014.01.008
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