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Time-Variation in the Persistence of Carbon Price Uncertainty: The Role of Carbon Policy Uncertainty

Author

Listed:
  • Oguzhan Cepni

    (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark)

  • Luis A. Gil-Alana

    (Faculty of Economics and ICS, University of Navarra, E-31080 Pamplona, Spain; Universidad Francisco de Vitoria, Facultad de Ciencias Juridicas y Empresariales, Madrid, Spain)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa.)

  • Onur Polat

    (Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye)

Abstract

We estimate models of fractional integration to determine the degree of persistence for two recently developed metrics of carbon price uncertainty: the Carbon VIX and Carbon Implied Volatility (CIV) covering the period of the 1st week of September 2013 to the 4th week of December 2022. First, we find the two metrics to be highly persistent but depicting mean-reversion with long-memory. Second, time-varying (recursive) estimation revealed that the underlying persistence is on a downward trend. Third, we show that the recent declines in persistence of carbon price uncertainties is a result of declining carbon policy uncertainty, the metric of which we develop using aggregate information on squared surprises of carbon futures price of various maturities. Given that carbon price uncertainty has been shown to negatively affect decarbonization investments, our findings have important implications for the European Union Emissions Trading System (EU-ETS).

Suggested Citation

  • Oguzhan Cepni & Luis A. Gil-Alana & Rangan Gupta & Onur Polat, 2024. "Time-Variation in the Persistence of Carbon Price Uncertainty: The Role of Carbon Policy Uncertainty," Working Papers 202446, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202446
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    1. Maximilian Fuchs & Johannes Stroebel & Julian Terstegge, 2024. "Carbon VIX: Carbon Price Uncertainty and Decarbonization Investments," NBER Working Papers 32937, National Bureau of Economic Research, Inc.
    2. K. Victor Chow & Wanjun Jiang & Bingxin Li & Jingrui Li, 2020. "Decomposing the VIX: Implications for the predictability of stock returns," The Financial Review, Eastern Finance Association, vol. 55(4), pages 645-668, November.
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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