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Carbon Price Drivers: Phase I Versus Phase II Equilibrium?

  • Anna Creti
  • Pierre-André Jouvet
  • Valérie Mignon

The aim of this paper is to investigate the determinants of the carbon price during the two phases of the European Union Emission Trading Scheme (EU ETS). More specifically, relying on daily EU allowance futures contracts, we test whether the carbon price drivers identified for Phase I still hold for Phase II and evolve toward a long-run relationship. Using cointegration techniques and accounting for the 2006 structural break on the carbon market, we show that while a cointegrating relationship exists for both phases of the EU ETS, the nature of this equilibrium relationship is different across the two subperiods, with an increasing role of fundamentals in Phase II. Deriving equilibrium values, we show that the carbon price tends to be undervalued since the end of 2009.

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Paper provided by CEPII research center in its series Working Papers with number 2011-09.

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Date of creation: Apr 2011
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Handle: RePEc:cii:cepidt:2011-09
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