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Banking and Borrowing in the EU ETS: An Econometric Appraisal of the 2005-2007 Intertemporal Market

Author

Listed:
  • Julien Chevallier

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

  • Emilie Alberola

    (Mission Climat Caisse des Dépôts - UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

This article critically examines the EU ETS intertemporal market during its Phase I (2005-2007). We test the Hotelling rule as a key element of a competitive equilibrium to validate whether allowance prices rise at the same rate as the interest rate. Including readily observable characteristics of the EU ETS such as the presence of one endogenous structural break and the influence of other energy markets shocks, we argue the inter-period ban on banking undermines the ability of the EU ETS to provide efficient price signalling. We also find a significant relationship between allowance price changes and the expected scarcity of allowances approximated by the Ellerman-Parsons ratio. Finally, our results show evidence of institutional learning by market participants.

Suggested Citation

  • Julien Chevallier & Emilie Alberola, 2009. "Banking and Borrowing in the EU ETS: An Econometric Appraisal of the 2005-2007 Intertemporal Market," Working Papers halshs-00388071, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00388071
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00388071
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    References listed on IDEAS

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      • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839.
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    Citations

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    Cited by:

    1. Leon Vinokur, 2009. "Disposition in the Carbon Market and Institutional Constraints," Working Papers 652, Queen Mary University of London, School of Economics and Finance.
    2. Georg Grüll & Luca Taschini, 2009. "A Comparison of Reduced-Form Permit Price Models and their Empirical Performances," Working Papers 0918, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    3. Rittler, Daniel, 2009. "Price Discovery, Causality and Volatility Spillovers in European Union Allowances Phase II: A High Frequency Analysis," Working Papers 0492, University of Heidelberg, Department of Economics.
    4. Leon Vinokur, 2009. "Disposition in the Carbon Market and Institutional Constraints," Working Papers 652, Queen Mary University of London, School of Economics and Finance.

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    Keywords

    Emissions trading; Banking; EU ETS; Hotelling rule; Ellerman-Parsons Ratio;
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