IDEAS home Printed from https://ideas.repec.org/p/kie/kieliw/1650.html
   My bibliography  Save this paper

Explaining European Emission Allowance Price Dynamics: Evidence from Phase II

Author

Listed:
  • Wilfried Rickels
  • Dennis Görlich
  • Gerrit Oberst

Abstract

In 2005, the European Emission Trading Scheme (EU-ETS) established a new commodity: the right to emit a ton of CO2 (EUA). Since its launch, the corresponding price has shown rather turbulent dynamics, including nervous reactions to policy announcements and a price collapse after a visible over-allocation in Phase I. As a consequence, the question whether fundamental factors (fossil fuel prices, economic activity, weather) affect the EUA price remained partially unresolved. Today, being halfway through Phase II (2008–2012) and relying on a more mature market, we use more reliable data to investigate the extent to which allowance price dynamics can be explained by market fundamentals. We empirically test for the influence of fuel prices, economic activity, and weather variations. Fuel prices allow to test for fuel switching from coal to gas, the most important short-term abatement option for most installations in the EU-ETS. The empirical results show a significant influence of gas, coal, and oil prices, of economic activity and of some weather variations. When including the relative price of coal to gas on a forward level, we found evidence of a switching effect. Yet, on a spot level the demand effect seems to dominate. However, when including the absolute coal price the coefficient is positive, contradicting theory with respect to both the switching and the demand effect. The significant weather variations suggest that their influence on EUA prices is less driven by their effect on energy demand but more by their effect on the provision of carbon-free renewable energy. Overall, our results show that the price dynamics are much better explained by a model based on fundamentals than by a purely autoregressive model. However, the results also show that fundamentals alone cannot fully explain price dynamics and that forecasting is improved by the inclusion of time series characteristics

Suggested Citation

  • Wilfried Rickels & Dennis Görlich & Gerrit Oberst, 2010. "Explaining European Emission Allowance Price Dynamics: Evidence from Phase II," Kiel Working Papers 1650, Kiel Institute for the World Economy.
  • Handle: RePEc:kie:kieliw:1650
    as

    Download full text from publisher

    File URL: https://www.ifw-members.ifw-kiel.de/publications/explaining-european-emission-allowance-price-dynamics-evidence-from-phase-ii/kwp1650.pdf
    Download Restriction: no

    More about this item

    Keywords

    Carbon emission trading; EU ETS; Carbon price influence factors; Fuel switching;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kie:kieliw:1650. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dieter Stribny). General contact details of provider: http://edirc.repec.org/data/iwkiede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.