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An Analysis of the EU Emission Trading Scheme

Author

Listed:
  • Don Bredin

    (University College Dublin)

  • Cal Muckley

    (University College Dublin)

Abstract

The European Union’s Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission’s Climate Change Program aimed at reducing green- house gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, energy price movements, economic growth, temperature and stock market activity determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine the heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 of the market and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS.

Suggested Citation

  • Don Bredin & Cal Muckley, 2010. "An Analysis of the EU Emission Trading Scheme," Working Papers 201003, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:201003
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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201003.pdf
    File Function: First version, 2010
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    Cited by:

    1. Simone Borghesi, 2011. "European Climate Policy: Critical Aspects," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 2, June.

    More about this item

    Keywords

    CO2 prices; EU ETS; Energy; Kyoto Protocol; Weather;

    JEL classification:

    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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