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Multiple bubbles in the European Union Emission Trading Scheme

Author

Listed:
  • Anna Creti

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Marc Joëts

Abstract

The European Union Emission Trading Scheme (EU ETS) is the first large scale CO2 emission trading system in the world. Carbon allowances are financial assets, potentially vulnerable to the behavior of traders and investors. In fact, the carbon price has been quite volatile since the inception of the market, and it has recently hit very low values. However, to date, no work exists to evaluate whether volatility and price spikes are due to episodes of speculation and price bubbles. Our paper fills this gap. We use the recent approaches developed by Phillips and Yu (2010), Phillips et al. (2011), and Phillips et al. (2015a, 2015b) who propose a recursive right sided unit root approaches to detect and date-stamp mildly explosive behaviors and carbon market exuberance. We complement this methodology by using the wild bootstrap procedure by Gonçalves and Kilian (2004) to control for the heteroschedasticity of carbon price data. Analyzing the EU ETS front month contract price, from 2005 to 2014, we find different episodes of price bubbles. These episodes are not explained by similar behavior of the fundamentals but seem related to energy and environmental policy announcements. Our results can provide insightful policy implications in the context of the actual carbon market reform, as well as the implementation of stricter financial regulations rules to CO2 trading.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Anna Creti & Marc Joëts, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Post-Print hal-01549809, HAL.
    • Handle: RePEc:hal:journl:hal-01549809
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    Cited by:

    1. Habibi, Arash, 2025. "Analyzing the carbon pricing-leakage nexus through structural gravity estimation," Energy Policy, Elsevier, vol. 198(C).
    2. Zhang, Yue & Zhao, Xin-gang & Zhou, Ying & Wang, Hui, 2025. "Impact of combined environmental policies on carbon emission reduction: A system dynamics analysis," Utilities Policy, Elsevier, vol. 94(C).
    3. Simone Borghesi & Michael Pahle & Grischa Perino & Simon Quemin & Maximilian Willner, 2023. "The Market Stability Reserve in the EU Emissions Trading System: A Critical Review," Annual Review of Resource Economics, Annual Reviews, vol. 15(1), pages 131-152, October.
    4. Perino, Grischa, 2024. "Carbon market design and market sentiment," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    5. Chiappari, Mattia & Scotti, Francesco & Flori, Andrea, 2025. "Hedging financial risks with a climate index based on EU ETS firms," Energy, Elsevier, vol. 320(C).
    6. Huang, Wenyang & Zhao, Jianyu & Wang, Xiaokang, 2024. "Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price," Energy Economics, Elsevier, vol. 132(C).
    7. Chiappari, Mattia & Scotti, Francesco & Flori, Andrea, 2024. "Market responses to spillovers in the energy commodity markets: Evaluating short-term vs. long-term effects and business-as-usual vs. distressed phases," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    8. Abakah, Emmanuel Joel Aikins & Shao, David Xuefeng & Tiwari, Aviral Kumar & Lee, Chien-Chiang, 2024. "Asymmetric relationship between carbon market and energy markets," Energy, Elsevier, vol. 313(C).
    9. Marina Friedrich & S'ebastien Fries & Michael Pahle & Ottmar Edenhofer, 2019. "Understanding the explosive trend in EU ETS prices -- fundamentals or speculation?," Papers 1906.10572, arXiv.org, revised Mar 2020.
    10. Lin, Boqiang & Jia, Zhijie, 2019. "What will China's carbon emission trading market affect with only electricity sector involvement? A CGE based study," Energy Economics, Elsevier, vol. 78(C), pages 301-311.
    11. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad, 2019. "Identification of multiple stock bubbles in an emerging market: application of GSADF approach," Economic Change and Restructuring, Springer, vol. 52(3), pages 301-326, August.
    12. Xu, Yingying & Salem, Sultan, 2021. "Explosive behaviors in Chinese carbon markets: are there price bubbles in eight pilots?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 145(C).
    13. Huang, Wenyang & Wang, Yizhi, 2024. "Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method," Energy Economics, Elsevier, vol. 134(C).
    14. Marina Friedrich & Sébastien Fries & Michael Pahle & Ottmar Edenhofer, 2020. "Rules vs. Discretion in Cap-and-Trade Programs: Evidence from the EU Emission Trading System," CESifo Working Paper Series 8637, CESifo.
    15. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
    16. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad & Hammad Hassan Mirza & Farooq Anwar, 2020. "Do stock price bubbles correlate between China and Pakistan? An inquiry of pre‐ and post‐Chinese investment in Pakistani capital market under China‐Pakistan Economic Corridor regime," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 323-335, July.
    17. Bolat, C. Kaan & Soytas, Ugur & Akinoglu, Bulent & Nazlioglu, Saban, 2023. "Is there a macroeconomic carbon rebound effect in EU ETS?," Energy Economics, Elsevier, vol. 125(C).
    18. Chiappari, Mattia & Scotti, Francesco & Flori, Andrea, 2025. "Portfolio hedging through a novel equity index based on the verified emissions of EU ETS-regulated firms," Economics Letters, Elsevier, vol. 247(C).
    19. Terranova, Roberta & Cozzarini, Chiara & Reissl, Severin & Tavoni, Massimo, 2025. "Detecting speculation in the market for EU emission allowances," Energy Economics, Elsevier, vol. 148(C).
    20. Azam Ghezelbash & Vahid Khaligh & Seyed Hamed Fahimifard & J. Jay Liu, 2023. "A Comparative Perspective of the Effects of CO 2 and Non-CO 2 Greenhouse Gas Emissions on Global Solar, Wind, and Geothermal Energy Investment," Energies, MDPI, vol. 16(7), pages 1-20, March.
    21. Shenhai Huang & Chao Du & Xian Jin & Daini Zhang & Shiyan Wen & Zhijie Jia, 2023. "The Impact of Carbon Emission Trading on Renewable Energy: A Comparative Analysis Based on the CGE Model," Sustainability, MDPI, vol. 15(16), pages 1-16, August.
    22. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2022. "The relationship between carbon-intensive fuel and renewable energy stock prices under the emissions trading system," Energy Economics, Elsevier, vol. 114(C).
    23. Demiralay, Sercan & Gencer, Hatice Gaye & Bayraci, Selcuk, 2022. "Carbon credit futures as an emerging asset: Hedging, diversification and downside risks," Energy Economics, Elsevier, vol. 113(C).
    24. Zhang, Lirong & Li, Yakun & Jia, Zhijie, 2018. "Impact of carbon allowance allocation on power industry in China’s carbon trading market: Computable general equilibrium based analysis," Applied Energy, Elsevier, vol. 229(C), pages 814-827.

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    Keywords

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    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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