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Understanding Carbon Trade Dynamics: A European Union Emissions Trading System Perspective

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  • Avirup Chakraborty

Abstract

The European Union Emissions Trading System (EU ETS), the worlds largest cap-and-trade carbon market, is central to EU climate policy. This study analyzes its efficiency, price behavior, and market structure from 2010 to 2020. Using an AR-GARCH framework, we find pronounced price clustering and short-term return predictability, with 60.05 percent directional accuracy and a 70.78 percent hit rate within forecast intervals. Network analysis of inter-country transactions shows a concentrated structure dominated by a few registries that control most high-value flows. Country-specific log-log regressions of price on traded quantity reveal heterogeneous and sometimes positive elasticities exceeding unity, implying that trading volumes often rise with prices. These results point to persistent inefficiencies in the EU ETS, including partial predictability, asymmetric market power, and unconventional price-volume relationships, suggesting that while the system contributes to decarbonization, its trading dynamics and price formation remain imperfect.

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  • Avirup Chakraborty, 2025. "Understanding Carbon Trade Dynamics: A European Union Emissions Trading System Perspective," Papers 2510.22341, arXiv.org.
    • Handle: RePEc:arx:papers:2510.22341
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    References listed on IDEAS

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    1. Zhao, Yuan & Gong, Xue & Zhang, Weiguo & Xu, Weijun, 2024. "Forecasting carbon futures returns using feature selection and Markov chain with sample distribution," Energy Economics, Elsevier, vol. 140(C).
    2. Zhikai Zhang & Yaojie Zhang & Yudong Wang & Qunwei Wang, 2024. "The predictability of carbon futures volatility: New evidence from the spillovers of fossil energy futures returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(4), pages 557-584, April.
    3. Jihun Kim & Kwangwoo Park, 2021. "Improving liquidity in emission trading schemes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1397-1411, September.
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