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Politics matters: Regulatory events as catalysts for price formation under cap-and-trade

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  • Koch, Nicolas
  • Grosjean, Godefroy
  • Fuss, Sabine
  • Edenhofer, Ottmar

Abstract

This paper investigates how the political process of making cap adjustments has shaped market outcomes in the world׳s largest cap-and-trade system – the EU ETS. Capitalizing on an event study method that incorporates an econometric technique designed to handle parameter instability and model uncertainty, we assess the news-implied price response to 29 hand-collected announcements about the EU ETS supply schedule. Our findings document a high market responsiveness to political events and reveal how market participants view the evolution of cap stringency in the light of a particular announcement. We provide evidence that a sequence of strong event-induced price drops evolve in the backloading decision process, which is consistent with the interpretation that market participant׳s confidence in the political support for reform, and probably the EU ETS in general, has been unsettled. We also document positive price reactions to the 2020 and 2030 policy packages, but not the 2050 roadmaps.

Suggested Citation

  • Koch, Nicolas & Grosjean, Godefroy & Fuss, Sabine & Edenhofer, Ottmar, 2016. "Politics matters: Regulatory events as catalysts for price formation under cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 121-139.
  • Handle: RePEc:eee:jeeman:v:78:y:2016:i:c:p:121-139
    DOI: 10.1016/j.jeem.2016.03.004
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    2. repec:eee:enepol:v:107:y:2017:i:c:p:119-130 is not listed on IDEAS
    3. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    4. Karoline S. Rogge & Elisabeth Dütschke, 2017. "Exploring Perceptions of the Credibility of Policy Mixes: The Case of German Manufacturers of Renewable Power Generation Technologies," SPRU Working Paper Series 2017-23, SPRU - Science and Technology Policy Research, University of Sussex.
    5. repec:eee:resene:v:49:y:2017:i:c:p:33-47 is not listed on IDEAS
    6. repec:spr:ieaple:v:17:y:2017:i:6:d:10.1007_s10784-017-9352-2 is not listed on IDEAS
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    8. Klenert, David & Mattauch, Linus & Combet, Emmanuel & Edenhofer, Ottmar & Hepburn, Cameron & Rafaty, Ryan & Stern, Nicholas, 2017. "Making Carbon Pricing Work," MPRA Paper 80943, University Library of Munich, Germany.
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    More about this item

    Keywords

    Cap-and-trade; EU ETS; Allowance supply; Political uncertainty; Event study; Bayesian;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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