European Carbon Prices Fundamentals in 2005-2007: The Effects of Energy Markets, Temperatures and Sectorial Production

Abstract

This article aims at characterizing the daily price fundamentals of European Union Allowances (EUAs) traded since 2005 as part of the Emissions Trading Scheme (ETS). First, the presence of two structural changes on April, 2006 following the disclosure of 2005 verified emissions and on October, 2006 following the European Commission announcement of stricter Phase II allocation allow to isolate distinct fundamentals evolving overtime. The results extend previous literature by showing that spot prices react not only to other energy markets and temperatures, but also to economic activity within the main sectors covered by the EU ETS such as proxied by sectoral production indices. Besides, the sub-period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes.

Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?

“…Secondly, this finding supports the adoption of the variety of modeling techniques used in the extant literature (e.g. Alberola et al (2008Alberola et al ( , 2009aAlberola et al ( , 2009b and Daskalakis et al (2009)), with a view to better understanding the behavior of EUA prices over time.…”

“…In contrast, Bredin and Muckley (2009), inter alia, adopt the Phillips-Perron (1988) test and report that they reject the null hypothesis of a stochastic trend in logarithmic EUA prices during a sample from the first phase of the scheme (July 1, 2005to December 31, 2007. However, consistent with the Alberola et al (2008Alberola et al ( , 2009aAlberola et al ( , 2009b Dickey-Fuller (1979, 1981 test, the Phillips-Perron (1988) test and the Kwiatkowski et al (1992) test. Paolella and Taschini (2008) and Benz and Trück (2009) Benz and Trück (2009) data are sourced with a major broker in the energy industry, Spectron, and are observations on over-the-counter transactions.…”

“…Alberola et al (2008Alberola et al ( , 2009aAlberola et al ( , 2009b, examine, inter alia, the Power next spot prices (replaced by Blue next since January 2008), over periods extending from July 2005 through to April 2007, by adopting unit root tests including the augmented Dickey-Fuller (1979,1981 test, the Phillips-Perron (1988) test, the Kwiatkowski et al (1992) test and the Lee-Strazicich (2001, 2003 tests. They report that for these samples they are unable to reject the hypothesis that the processes are difference stationary that is that they contain a unit root.…”

Modeling persistence of carbon emission allowance prices

“…Some recent studies have focused on the efficiency of carbon emission markets (see, for example, Daskalakis and Markellos, 2008;Joyeux and Milunovich, 2010;Charles, Darné and Fouilloux, 2011); determinants of CO 2 allowance prices (see, for example, Alberola et al, 2007Alberola et al, , 2008aChevallier, 2009;Hintermann, 2010;Hitzemann andUhrig-Homburg, 2013 andHammoudeh et al, 2014a,b among many others), comovements of carbon allowance prices and the prices of other financial assets (see, for example, Chevallier, 2011a,b), while other studies have analyzed the relationship between carbon spot and futures prices (see, for example, Uhrig-Homburg and Wagner, 2009;Joyeux and Milunovich, 2010;Chevallier, 2010;Arouri et al, 2012 andRittler, 2012, among others).…”

“…Some papers that analyze price drivers of CO 2 emission allowance prices are Alberola et al (2007Alberola et al ( , 2008a, Chevallier (2009), Hintermann (2010, Kim and Koo (2010), Hitzemann and Uhrig-Homburg (2013), Wang et al (2013) andHammoudeh et al (2014a,b) among many others. Price drivers of CO 2 emission allowances are temperature (Alberola et al, 2008a;Hinterman, 2010), prices of fuel, crude oil, coal and natural gas (Alberola et al, 2008a;Hintermann, 2010;Kim and Koo, 2010;Hammoudeh et al, 2014c), macroeconomic variables, production structures change and population growth (Chevalier, 2009;Conrad et al, 2012;Wang et al, 2013).…”