Dynamic Simulation Analysis on EUA and CER Futures Prices at Two Phases of European Union Emission Trading Scheme

Abstract

Based on data from European Union Emission Trading Scheme (EU ETS) 2nd phase, 3rd phase, and outlier-free 3rd phase, we used Johansen test, vector error correction, pulse response function and variance decomposition to empirically compare the long-term equilibrium relationships as well as interactions of futures prices of two major EU ETS commodities: European Union Allowance (EUA) and Certified Emission Reduction (CER). We find long-term stable positive equilibrium relationship for EUA and CER futures prices at the 2nd phase, but at the 3rd phase, co-integration of full-sample data disappears, while a positive equilibrium relationship occurs after outlier exclusion, though weaker compared with the 2nd phase. The EUA futures prices at the 3rd phase after outlier exclusion are more sensitive to market changes, but due to the complication of uncertainty factors at the 3rd phase, the correction direction of CER futures prices is changed. EUA versus CER futures prices do not show strong linkage at the 2nd phase, and the guiding role of a certain price disappears.