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Regulatory Stringency in Issuing Certified Emission Reductions and Price Effects in Secondary Markets

Author

Listed:
  • Yu, Fei
  • Grady, Patrick
  • Knipp, Robert

Abstract

The Kyoto Clean Development Mechanism (CDM) is the first “global” and largest carbon offset instrument, supplementing national or regional cap and trade systems such as the European Union’s Emission Trading Scheme (EU ETS). This paper draws on weekly IDEACarbon survey data from 2008 to 2010 to empirically examine how investor’s perception of the CDM regulatory and administrative framework affects the price of CERs in secondary markets (denoted as sCER) and the price spread with EUAs. Results from cointegration analysis and GARCH modeling indicate that the perception of investors about the relative stringency and efficiency of this framework is a significant determinant of the sCER price and the EUA-sCER price spread. An increase in perceived stringency causes significant increases in sCER prices and a substantial narrowing of the EUA/sCER price spread (and vise versa). The analysis also shows that the EU ETS market was instable over the period examined, with a structural shift occurring at the end of 2008 likely due to the 2008 financial crisis.

Suggested Citation

  • Yu, Fei & Grady, Patrick & Knipp, Robert, 2012. "Regulatory Stringency in Issuing Certified Emission Reductions and Price Effects in Secondary Markets," MPRA Paper 50184, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50184
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    File URL: https://mpra.ub.uni-muenchen.de/50184/1/MPRA_paper_50184.pdf
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    References listed on IDEAS

    as
    1. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
    2. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
    3. Karoline Flåm, 2009. "Restricting the import of ‘emission credits’ in the EU: a power struggle between states and institutions," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 9(1), pages 23-38, February.
    4. Alberola, Emilie & Chevallier, Julien & Cheze, Benoi^t, 2008. "Price drivers and structural breaks in European carbon prices 2005-2007," Energy Policy, Elsevier, vol. 36(2), pages 787-797, February.
    5. World Bank, 2010. "World Development Report 2010," World Bank Publications, The World Bank, number 4387, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Yadira Mori Clement & Birgit Bednar-Friedl, 2017. "Do Clean Development Mechanism projects generate local employment? Testing for sectoral effects across Brazilian municipalities," Graz Economics Papers 2017-05, University of Graz, Department of Economics.

    More about this item

    Keywords

    emission permits; EUA-sCER Spread; spot and future price dynamics; carbon derivatives;

    JEL classification:

    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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