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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.

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  • 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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    3. Sascha Kollenberg & Luca Taschini, 2016. "Emissions trading systems with cap adjustments," GRI Working Papers 195, Grantham Research Institute on Climate Change and the Environment.
    4. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
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    7. Röttgers, Dirk & Grote, Ulrike, 2014. "Africa and the Clean Development Mechanism: What Determines Project Investments?," World Development, Elsevier, vol. 62(C), pages 201-212.
    8. Lucia, Julio J. & Mansanet-Bataller, Maria & Pardo, Ángel, 2015. "Speculative and hedging activities in the European carbon market," Energy Policy, Elsevier, vol. 82(C), pages 342-351.
    9. Palao, Fernando & Pardo, Ángel, 2014. "What makes carbon traders cluster their orders?," Energy Economics, Elsevier, pages 158-165.
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    Keywords

    European Union Emission Trading Scheme; European Union Allowances; Trading frictions; Informativeness of prices; Market quality; Market microstructure;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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