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California´s Carbon Market and Energy Prices: A Wavelet Analysis

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Abstract

Carbon price is a key variable in management and risk decisions in activities related to the burning of fossil fuels. Different major players in this market, such as polluters, regulators, and financial actors, have different time horizons. We use innovative multivariate wavelet analysis tools, including partial wavelet coherency and partial wavelet gain, to study the link between carbon prices and final energy prices in the time and frequency dimensions in California’s carbon market, officially known as the California cap-and-trade program. We find that gasoline prices lead an anti-phase relation with carbon prices. This result is very stable at lower frequencies (close to one-year period cycles), and it is also present before mid-2015 in the 20 ∼ 34 weeks frequency-band. Regarding electricity, we find that at about a one-year period, a rise in carbon prices is reflected in higher electricity prices. We conclude that the first five years of compliance of the California cap-and-trade program show t at emissions’ trading is a significant measure for climate change mitigation, with visible rising carbon prices. The quantitative financial analytics we present supports the recent decision to extend the current market to 2030 without the need for complementary carbon pricing schemes.

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  • Luís Aguiar-Conraria & Maria Joana Soares & Rita Sousa, 2017. "California´s Carbon Market and Energy Prices: A Wavelet Analysis," NIPE Working Papers 13/2017, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:13/2017
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    Cited by:

    1. Aguiar-Conraria, Luis & Martins, Manuel M.F. & Soares, Maria Joana, 2018. "Estimating the Taylor rule in the time-frequency domain," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 122-137.
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    3. Fernando Alexandre & Pedro Bação & Miguel Portela, 2019. "A flatter life-cycle consumption profile," NIPE Working Papers 01/2019, NIPE - Universidade do Minho.
    4. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2019. "The Phillips Curve at 60: time for time and frequency," CEF.UP Working Papers 1902, Universidade do Porto, Faculdade de Economia do Porto.
    5. Aguiar-Conraria, Luís & Martins, Manuel M.F. & Soares, Maria Joana, 2020. "Okun’s Law across time and frequencies," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    6. Mustapha Olalekan Ojo & Luís Aguiar-Conraria & Maria Joana Soares, 2019. "A Time-Frequency Analysis of Sovereign Debt Contagion in Europe," NIPE Working Papers 11/2019, NIPE - Universidade do Minho.

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    Keywords

    Multivariate wavelet analysis; partial wavelet gain; partial wavelet coherency; carbon market; energy prices; California ETS.;
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