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Market efficiency and the U.S. market for sulfur dioxide allowances

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  • Hitaj, Claudia
  • Stocking, Andrew

Abstract

Focusing on the U.S. sulfur dioxide (SO2) allowance market from its inception in 1994 to 2009, we model allowance prices to determine the influence of market fundamentals on allowance price level and volatility. We find evidence that the SO2 market operates in ways that are not inconsistent with an efficient market – prices that reflect marginal abatement costs – after the first few years of the program but before a court decision that introduced significant uncertainty into the market in mid-2008. Our empirical analysis finds that the SO2 market, similar to other emission markets studied in the literature, can remain relatively inefficient for several years after launch. We also find that market volatility increases in response to all types of communications from the administrator, suggesting that the development of a formal communication strategy, possibly similar to that used by central banks, would reduce price volatility and increase the efficiency of the market.

Suggested Citation

  • Hitaj, Claudia & Stocking, Andrew, 2016. "Market efficiency and the U.S. market for sulfur dioxide allowances," Energy Economics, Elsevier, vol. 55(C), pages 135-147.
  • Handle: RePEc:eee:eneeco:v:55:y:2016:i:c:p:135-147
    DOI: 10.1016/j.eneco.2016.01.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ling Huang & Yishu Zhou, 2019. "Carbon Prices and Fuel Switching: A Quasi-experiment in Electricity Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 53-98, September.
    2. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    3. Gabriel E. Lade & James Bushnell, 2019. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(3), pages 563-592.
    4. Gabriel E. Lade & James Bushnell, 2016. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp570, Center for Agricultural and Rural Development (CARD) at Iowa State University.

    More about this item

    Keywords

    Sulfur dioxide market; Efficiency; Volatility; Communication policy;

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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