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Flexibility in the market for international carbon credits and price dynamics difference with European allowances

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  • Gavard, Claire
  • Kirat, Djamel

Abstract

The Paris Agreement establishes a mechanism which allows a Party to benefit from greenhouse gas emissions reductions conducted in a host Party to fulfil its nationally determined contribution. In this context, the objective of this paper is to improve the understanding of carbon offset price dynamics in comparison with regular carbon market allowances. We combine a cointegration approach with risk premium considerations to compare the price dynamics of European Union Allowances (EUA) and Certified Emission Reductions (CER) in the second phase of the European carbon market. By taking account of breaks identified in the series, we find that, while the EUA and CER returns present comparable dynamics mainly driven by fuel switching, the long-term relationships between the price of these two types of permits and their drivers differ significantly. Whereas the price of EUA is well explained by a demand effect, the impact of energy prices on the CER price suggests the existence of a supply-side effect for credits. We find that the price elasticity of allowances with regard to the coal and gas prices is negative in time periods of low economic activity and positive during the remaining time. We explain the former with the fact that the market is not tight and the latter with the effect of the economic activity on the price of commodities and energy.

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  • Gavard, Claire & Kirat, Djamel, 2018. "Flexibility in the market for international carbon credits and price dynamics difference with European allowances," Energy Economics, Elsevier, vol. 76(C), pages 504-518.
  • Handle: RePEc:eee:eneeco:v:76:y:2018:i:c:p:504-518
    DOI: 10.1016/j.eneco.2018.10.018
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    Cited by:

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    2. Gavard, Claire & Kirat, Djamel, 2020. "Short-term impacts of carbon offsetting on emissions trading schemes: Empirical insights from the EU experience," ZEW Discussion Papers 20-058, ZEW - Leibniz Centre for European Economic Research.
    3. Leal, Patrícia Hipólito & Marques, António Cardoso, 2020. "Rediscovering the EKC hypothesis for the 20 highest CO2 emitters among OECD countries by level of globalization," International Economics, Elsevier, vol. 164(C), pages 36-47.
    4. Liu, Zhibin & Huang, Shan, 2021. "Carbon option price forecasting based on modified fractional Brownian motion optimized by GARCH model in carbon emission trading," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    5. Gavard, Claire & Schoch, Niklas, 2021. "Climate finance and emission reductions: What do the last twenty years tell us?," ZEW Discussion Papers 21-014, ZEW - Leibniz Centre for European Economic Research.
    6. Diogo José Horst, 2020. "A Short Review on Carbon Footprint," Open Access Journal Of Environmental & Soil Science, Lupine Publishers, LLC, vol. 5(3), pages 642-651, July.
    7. Djamel KIRAT & Claire GAVARD, 2020. "Short-term impacts of carbon offsetting on emissions trading schemes: empirical insights from the EU experience," LEO Working Papers / DR LEO 2821, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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    More about this item

    Keywords

    European allowances; International credits; Emissions trading; Power sector; Structural breaks; Time series analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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