Emission permits and the announcement of realized emissions: Price impact, trading volume, and volatilities

Hitzemann, Steffen; Uhrig‐Homburg, Marliese; Ehrhart, Karl‐Martin

doi:10.1016/j.eneco.2015.07.007

Cited by 16 publications

(11 citation statements)

References 28 publications

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“…Interestingly, in comparison to other commodity markets, the relationship between prices of spot and futures contracts and convenience yields in the EU‐ETS has not been studied extensively. At the same time, as pointed out by, e.g., Benz and Hengelbrock (); Hitzemann et al (); Lucia et al (); Mizrach and Otsubo (), trading volume and liquidity in the

{CO}_{2}

futures market have increased significantly over recent years, emphasizing the importance of futures contracts also for the trading of emission allowances. However, as shown by Crossland et al (), despite its rapid evolution, the EU‐ETS is not informationally efficient yet.…”

Section: Introductionmentioning

confidence: 75%

“…On the other hand, the demand side depends on the evolution of EUA price drivers that include long‐ and short‐term abatement options, energy prices, weather conditions, and economic growth. Despite the specific features of the emission allowance market, since the introduction of exchanges for spot and futures contracts, the price behavior of

{CO}_{2}

allowances has typically been analyzed in a way very similar to other commodities or financial assets, see, e.g., Benz and Trück (); Chesney and Taschini (); Chevallier (); Crossland et al (); Daskalakis et al (); Gronwald et al (); Hintermann (); Hitzemann et al (); Paolella and Taschini (); Seifert et al ().…”

Section: Introductionmentioning

confidence: 99%

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Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period

Trück

Weron

2016

Journal of Futures Markets

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We examine convenience yields and risk premiums in the EU‐wide CO2 emissions trading scheme (EU‐ETS) during the first Kyoto commitment period (2008–2012). We find that the market has changed from initial backwardation to contango with significantly negative convenience yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking, as well as returns, variance, or skewness in the EU‐ETS spot market. Our findings suggest that the drop in risk‐free rates during and after the financial crisis has impacted on the deviation from the cost‐of‐carry relationship for emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between convenience yields and the increasing level of inventory during the first Kyoto commitment period, providing an explanation for the high negative convenience yields. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices. Overall, our results contribute to the literature on the determinants and empirical properties of convenience yields and risk premiums for this relatively new class of assets. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:587–611, 2016

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Section: Introductionmentioning

confidence: 75%

{CO}_{2}

Section: Introductionmentioning

confidence: 99%

Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period

Trück

Weron

2016

Journal of Futures Markets

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“…This market behaviour appears to be consistent with the EU-ETS. Hitzemann et al (2015) report that trading is relatively calm on the days before compliance events, but trading volumes are significantly higher on compliance days as the market incorporates the emission permit option prices.…”

Section: Market Dynamics In Each Pilotmentioning

confidence: 99%

Dynamics of China’s carbon prices in the pilot trading phase

2017

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This paper is the first to investigate empirically the link between carbon prices and macro risks in China's cap-and-trade pilot scheme. Using data from four pilot markets in Beijing, Guangdong, Hubei, and Shenzhen from 2014 to 2016, we demonstrate that the carbon price in Hubei is weakly linked to international prices of natural gas. Our results also indicate that energy, utilities, industrial and materials sector indices are positively related to the allowance prices in Shenzhen and Guangdong, suggesting that higher emitters in the region may have factored the carbon price into their production mix. We find no statistically significant relationship in the Beijing pilot. Overall, the findings suggest that China's carbon market is currently in an early stage of development, as the carbon price fundamentals are weak and the markets are comparatively less efficient than the European trading scheme in an informational sense. The findings of the paper have policy implications for the upcoming integration of regional markets into the national carbon market.

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“…Interesting recent research has been undertaken on analyses of price and volatility from the perspective of derivative markets and alternative volatility models, such as the price impact, trading volume and volatilities associated with mission permits and the announcement of realized emissions in [23] Hitzemann, Uhrig-Homburg, and Ehrhart (2015); a Bayesian approach to the stochastic volatility of future prices of emission allowances in [24] Kim, Park, and Ryu (2017); and the empirical performance of reduced form models for emission permit prices in [25] Hitzemann and Uhrig-Homburg (2019).…”

Section: Literature Reviewmentioning

confidence: 99%

Modeling Latent Carbon Emission Prices for Japan: Theory and Practice

Chang

McAleer

2019

Energies

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Climate change and global warming are significantly affected by carbon emissions that arise from the burning of fossil fuels, specifically coal, oil, and gas. Accurate prices are essential for the purposes of measuring, capturing, storing, and trading in carbon emissions at regional, national, and international levels, especially as carbon emissions can be taxed appropriately when the price is known and widely accepted. This paper uses a novel Capital (K), Labor (L), Energy (E) and Materials (M) (or KLEM) production function approach to calculate the latent carbon emission prices, where carbon emission is the output and capital (K), labor (L), energy (E) (or electricity), and materials (M) are the inputs for the production process. The variables K, L, and M are essentially fixed on a daily or monthly basis, whereas E can be changed more frequently, such as daily or monthly, so that changes in carbon emissions depend on changes in E. If prices are assumed to depend on the average cost pricing, the prices of carbon emissions and energy may be approximated by an energy production model with a constant factor of proportionality, so that carbon emission prices are a function of energy prices. Using this novel modeling approach, this paper estimates the carbon emission prices for Japan using seasonally adjusted and unadjusted monthly data on the volumes of carbon emissions and energy, as well as energy prices, from December 2008 to April 2018. The econometric models show that, as sources of electricity, the logarithms of coal and oil, though not Liquefied Natural Gas (LNG,) are statistically significant in explaining the logarithm of carbon emissions, with oil being more significant than coal. The models generally displayed a high power in predicting the latent prices of carbon emissions. The usefulness of the empirical findings suggest that the methodology can also be applied for other countries where carbon emission prices are latent.

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Emission permits and the announcement of realized emissions: Price impact, trading volume, and volatilities

Cited by 16 publications

References 28 publications

Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period

Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period

Dynamics of China’s carbon prices in the pilot trading phase

Modeling Latent Carbon Emission Prices for Japan: Theory and Practice

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