Determinants of Carbon Emission Prices

Abstract

Carbon emission allowances are considered an important policy instrument to prevent an undesirable increase in the Earth's temperature caused by the excess of greenhouse gases in the atmosphere. Most of the existing literature modeled the behavior of allowance prices before the implementation of regulatory measures such as the market stability reserve mechanism. In this chapter, the main determinants of the carbon emissions allowance prices in the European Union are examined, applying econometric models—ARCH and GARCH—that take into consideration the allowances supply in the future market, the energy prices, the stock indices, and the regulatory measures. The results depicted that the most relevant variables affecting the allowance prices were the regulatory measures that mainly restrict the number of allowances available. Understanding the dynamics of the variables that impact these prices can help policymakers to address the oversupply of allowances by sending correct price signals to the market participants.