An Emerging Equilibrium in the EU Emissions Trading Scheme

30 Pages Posted: 4 Sep 2009 Last revised: 17 Sep 2010

See all articles by Don Bredin

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Cal B. Muckley

University College Dublin

Date Written: June 23, 2010

Abstract

The European Union’s Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission’s Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, economic growth, energy prices and weather conditions determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS.

Keywords: CO2 prices, EU ETS, Energy, Kyoto Protocol, Weather

JEL Classification: Q49, G12, G15

Suggested Citation

Bredin, Don and Muckley, Cal B., An Emerging Equilibrium in the EU Emissions Trading Scheme (June 23, 2010). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1467498

Don Bredin (Contact Author)

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Cal B. Muckley

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

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