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The efficiency analysis of the European CO2 futures market

Author

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  • Bao-Jun Tang
  • Cheng Shen
  • Chao Gao

Abstract

The European Union Emissions Trading System (EU ETS) is the main international carbon trading market, in which European Union CO2 allowances (EUAs) are traded with increasing intensity. In order to help the market participants mitigate the market price risk, one possible way is to analyze the time range of market efficiency and the price discovery mechanism of EUA futures market and spot market. For this purpose, the paper provides the unit root test and the cointegration test for the EUA futures market during 2009-2011. Our result shows that the EUA futures market is efficient within 1 month. Furthermore, it illustrates that the impact of the price will continue for 3 months, examined by a vector error correction model (VECM).

Suggested Citation

  • Bao-Jun Tang & Cheng Shen & Chao Gao, 2012. "The efficiency analysis of the European CO2 futures market," CEEP-BIT Working Papers 36, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology.
    • Handle: RePEc:biw:wpaper:36
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    File URL: http://ceep.bit.edu.cn/docs/2018-10/20181011135603900264.pdf
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    References listed on IDEAS

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    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    2. George Milunovich & Roselyne Joyeux, 2007. "Testing Market Efficiency and Price Discovery in European Carbon Markets," Research Papers 0701, Macquarie University, Department of Economics.
    3. Zhang, Yue-Jun & Wei, Yi-Ming, 2010. "An overview of current research on EU ETS: Evidence from its operating mechanism and economic effect," Applied Energy, Elsevier, vol. 87(6), pages 1804-1814, June.
    4. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
    5. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
    6. Barbara Buchner & Carlo Carraro & A. Denny Ellerman, 2006. "The Allocation of European Union Allowances: Lessons, Unifying Themes and General Principles," Working Papers 0615, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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    8. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
    9. Haar, Laura N. & Haar, Lawrence, 2006. "Policy-making under uncertainty: Commentary upon the European Union Emissions Trading Scheme," Energy Policy, Elsevier, vol. 34(17), pages 2615-2629, November.
    10. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2008," World Bank Other Operational Studies 13405, The World Bank.
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    Citations

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    Cited by:

    1. repec:spr:ieaple:v:18:y:2018:i:5:d:10.1007_s10784-018-9411-3 is not listed on IDEAS
    2. Baruník, Jozef & Malinská, Barbora, 2016. "Forecasting the term structure of crude oil futures prices with neural networks," Applied Energy, Elsevier, vol. 164(C), pages 366-379.
    3. Zhao, Xin-gang & Jiang, Gui-wu & Nie, Dan & Chen, Hao, 2016. "How to improve the market efficiency of carbon trading: A perspective of China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 59(C), pages 1229-1245.
    4. repec:eee:appene:v:251:y:2019:i:c:60 is not listed on IDEAS
    5. Liu, Xiaojia & An, Haizhong & Wang, Lijun & Jia, Xiaoliang, 2017. "An integrated approach to optimize moving average rules in the EUA futures market based on particle swarm optimization and genetic algorithms," Applied Energy, Elsevier, vol. 185(P2), pages 1778-1787.
    6. repec:eee:rensus:v:79:y:2017:i:c:p:1-8 is not listed on IDEAS
    7. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.
    8. Bao-jun Tang & Cheng Shen & Yi-fan Zhao, 2015. "Market risk in carbon market: an empirical analysis of the EUA and sCER," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 75(2), pages 333-346, February.
    9. repec:eco:journ2:2017-06-8 is not listed on IDEAS
    10. repec:eee:appene:v:227:y:2018:i:c:p:403-414 is not listed on IDEAS

    More about this item

    Keywords

    Market Efficiency; Cointegration; Vector Error Correction Model; European carbon futures market;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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