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

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  • Julien Chevallier

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

  • Emilie Alberola

    (Mission Climat Caisse des Dépôts - UP1 - Université 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://halshs.archives-ouvertes.fr/halshs-00388071
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    References listed on IDEAS

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    1. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    2. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    3. Schleich, Joachim & Ehrhart, Karl-Martin & Hoppe, Christian & Seifert, Stefan, 2006. "Banning banking in EU emissions trading?," Energy Policy, Elsevier, vol. 34(1), pages 112-120, January.
    4. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    5. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, May.
    6. Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, vol. 103(418), pages 511-530, May.
    7. Tobias Kronenberg, 2008. "Should We Worry About The Failure Of The Hotelling Rule?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 774-793, September.
    8. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894.
      • 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.
    9. Junsoo Lee & Mark Strazicich, 2001. "Testing the null of stationarity in the presence of a structural break," Applied Economics Letters, Taylor & Francis Journals, vol. 8(6), pages 377-382.
    10. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
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    Cited by:

    1. 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.
    2. 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.
    3. Leon Vinokur, 2009. "Disposition in the Carbon Market and Institutional Constraints," Working Papers 652, Queen Mary University of London, School of Economics and Finance.

    More about this item

    Keywords

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

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