Catalysts for Price Discovery in the European Union Emissions Trading System

Schultz, Emma; Swieringa, John

doi:10.2139/ssrn.2179686

Cited by 3 publications

(3 citation statements)

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“…This finding agrees with the extant macroeconomic literature that suggests the increasing maturity of EU ETS 7,8 . Stable value realization of emission abatements facilitates the financial management of carbon allowances, which are widely recognized as financial assets [39][40][41][42][43][44] that influence a series of energy commodities such as crude oil and natural gas 29 .…”

Section: Discussionmentioning

confidence: 99%

Assessing the impact of ETS trading profit on emission abatements based on firm-level transactions

Guo

Liu

et al. 2020

Nat Commun

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The EU Emission Trading System (ETS) is the oldest and currently the largest carbon market in the world, but its purpose of stimulating carbon emissions via trading profits remains unexamined. Based on the complete firm-level transaction records of the EU ETS Phases I and II, here we show that the participating firms' trading profits and their emission abatements are positively correlated, and the correlation becomes stronger in Phase II than Phase I. Specifically, we observe that non-linearity exists in the correlation; higher firm-level emission abatements can realize larger trading profits. This pattern affects the market fairness, though it may be helpful to incentivise emission abatements. The correlation is more regulated in Phase II than it is in Phase I, thereby indicating that the Phase II is more mature. We also observe that the state-level abatements are largely driven by industrial giants.

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Section: Discussionmentioning

confidence: 99%

Assessing the impact of ETS trading profit on emission abatements based on firm-level transactions

Guo

Liu

et al. 2020

Nat Commun

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“…Frino et al (2010) and Medina et al (2014) similarly interpret the existence of positive bid-ask spreads. Relatedly, Charles et al (2013), Schultz & Swieringa (2014) and Friedrich et al (2019) stress that such frictions could partly explain the observed deviations from cost-of-carry arbitrage between spot and futures prices as predicted by theory.…”

Section: Transaction Costs and Empirical Literaturementioning

confidence: 94%

Emissions trading with transaction costs

Baudry

Faure

Quemin

2021

Journal of Environmental Economics and Management

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We develop an equilibrium model of emissions permit trading in the presence of fixed and proportional trading costs in which the permit price and firms' participation in and extent of trading are endogenously determined. We analyze the sensitivity of the equilibrium to changes in the trading costs and firms' allocations, and characterize situations where the trading costs alternatively depress or raise permit prices relative to frictionless market conditions. We calibrate our model to annual transaction and compliance data in Phase II of the EU ETS (2008)(2009)(2010)(2011)(2012) which we consolidate at the firm level. We find that trading costs in the order of 10 ke per annum plus 1 e per permit traded substantially reduce discrepancies between observations and theoretical predictions for firms' behavior (e.g. autarkic compliance). Our simulations suggest that ignoring trading costs leads to an underestimation of the price impacts of supply-curbing policies, this difference varying with the incidence on firms.

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“…This is due to the fact that the carbon asset and related derivatives can now be used for different investment operations, such as portfolio diversification, arbitrage, hedging, and speculation. The carbon futures markets are of particular interest due to their crucial role in facilitating risk mitigation and transfer among market operators, and helping the price discovery process in the spot markets (see for instance Arouri et al, 2012;Milunovich and Joyeux, 2007;Schultz and Swieringa, 2014).…”

Section: Introductionmentioning

confidence: 99%