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The timeline of trading frictions in the European carbon market

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

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.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 42 (2014)
Issue (Month): C ()
Pages: 378-394

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Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:378-394
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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