price determination in the eu ets market theory and econometric analysis with market fundamentals abstract we investigate the price determination of the european union emission allowance eua of the european union emissions trading scheme eu ets we postulate an uncertain permit price and risk averse firms which have the possibility to hedge in the forward market the firms produce final goods abate their emissions and trade permits in the permit market the dependence of the equilibrium permit price on exogenous variables is studied in a permit market model we test our theoretical findings with empirical data from 2005 to 2010 in the eu ets market we use daily forward prices of eua as our dependent variable we use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals such as german electricity prices and gas and coal prices with the price of eua we find that the eua forward price depends on fundamentals especially on the price of electricity as well as on the gas coal difference in a statistically significant way

a comparative analysis of the rationality of consensus forecasts of u s economic indicators the purpose of this article is to investigate the rationality of two survey forecasts of selective u s macroeconomic performance measures that were widely followed in the financial markets during the 1990 2000 period the research compares the rationality of survey forecast data from money market services inc and thomson financial this article extends prior research that has evaluated the rationality of money market services data for earlier time periods while also evaluating similar consensus forecast data from thomson financial that were widely reported in both barron s and the wall street journal during the 1990s

why does the combination of the european union emissions trading scheme and a renewable energy target makes economic sense abstract the european climate and energy mix of targets and policies has been criticised by many economists in particular it is often argued that the renewable energy targets do not make economic sense because they represent an expensive option to reduce co2 emissions within a cap and trade scheme such as the european union emissions trading scheme eu ets in addition it has also been claimed that support for renewable electricity deployment negatively interacts with the eu ets having a dampening effect on the co2 price which favours the dirtiest technologies and is detrimental for the greener ones in this article we argue that this mainstream economic view is short sighted and that a multidisciplinary economic analysis of the climate and energy policy mix is required mainstream economic analysis is based on a narrow approach for the assessment of instrument combinations and neglects relevant insights from several economic disciplines including innovation economics and political economy approaches in reality economic theory supports the combination of an ets and renewable energy targets the existence of different policy goals and market failures the demand pull influence of renewable energy policies on innovation a political economy approach and the different risk exposure of renewable energy technologies call for a policy mix although policy combinations are not a panacea and bring problems on their own the aforementioned negative interaction between renewable energy deployment and the carbon price in the eu ets can be mitigated through appropriate coordination and or instrument choice and design

reprint of price and quantity collars for stabilizing emission allowance prices laboratory experiments on the eu ets market stability reserve abstract we report on laboratory experiments with financially motivated participants comparing alternative proposals for managing the time path of emission allowance prices in the face of random firm specific and market level structural shocks market outcome measures such as social surplus and price variability are improved by the use of a price collar auction reserve price and soft price cap comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances in some specifications the quantity collar performed worse than no stabilization policy at all the experiment implemented a specific set of structural elements and extrapolation to other settings should be done with caution nevertheless an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important although perhaps not exclusive role to play in constructing an effective market stability policy

comparing policies to confront permit over allocation abstract instability in cap and trade markets particularly with respect to permit price collapses has been an area of concern for regulators to that end several policies including hybrid price quantity mechanisms and the newly introduced market stability reserve msr systems have been introduced and even implemented in some cases i develop a stochastic dynamic model of a cap and trade system parameterized to values relevant to the european union s emission trading system eu ets to analyze the performance of these policies aimed at adding stability to the system or at least at reducing perceived over allocations of permits results suggest that adaptive allocation mechanisms such as a price collar or msr can reduce permit over allocations and permit price volatility in a more cost effective manner than simply reducing scheduled permit allocations however it is also found that the performance of these adaptive allocation policies and in particular the msr are greatly affected by assumed discount rates and policy parameters

the influence of collective action on the demand for voluntary climate change mitigation in hypothetical and real situations in this experiment we investigate determinants of the individual demand for voluntary climate change mitigation subjects decide between a cash prize and an allowance from the eu emissions trading scheme for one ton of co2 that will be deleted afterwards we vary the incentives of the decision situation in which we distinguish between real monetary incentives and a hypothetical decision situation with and without a cheap talk script furthermore decisions were implemented either as purely individual or as a collective action using majority voting we observe a significant hypothetical bias in the demand for voluntary climate change mitigation in case of the individual decision situation this bias is caused solely by subjects with low income collective decision making affects demand positively in the hypothetical decision situation only

nobel lecture the economic way of looking at behavior an important step in extending the traditional theory of individual rational choice to analyze social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes preferences and calculations while this approach to behavior builds on an expanded theory of individual choice it is not mainly concerned with individuals it uses theory at the micro level as a powerful tool to derive implications at the group or macro level the lecture describes the approach and illustrates it with examples drawn from my past and current work

a symmetric safety valve abstract how to set policy in the presence of uncertainty has been central in debates over climate policy concern about costs has motivated the proposal for a cap and trade program for carbon dioxide with a safety valve that would mitigate against spikes in the cost of emission reductions by introducing additional emission allowances into the market when marginal costs rise above the specified allowance price level we find two significant problems both stemming from the asymmetry of an instrument that mitigates only against a price increase one is that most important examples of price volatility in cap and trade programs have occurred not when prices spiked but instead when allowance prices collapsed second a single sided safety valve may have unintended consequences for investment we illustrate that a symmetric safety valve provides environmental and welfare improvements relative to the conventional one sided approach

transactions in the european carbon market a bubble of compliance in a whirlpool of speculation the european union emissions trading scheme eu ets is supposed to help regulated installations to cover their co2 emissions by trading in allowances in practice the eu ets is mainly a financial market used for hedging and speculation this financial feature is regarded as a solution hedging and liquidity to a problem the price risk and volatility imposed on installations which the market has actually created itself this paper provides an estimation of the real underpinning of the scheme i e the needs of installations for allowances transfers to achieve compliance in the two first exchange periods this estimation which was singularly lacking in the literature shows that compliance transactions become more and more marginal as market activity grows and that they are drowned in a whirlpool of speculation this challenges the role of the carbon price whose financial and self referential evaluation can obviously not reveal installations marginal abatement costs the condition of cost effectiveness expected from carbon trading

tests for parameter instability in regressions with i 1 processes this article derives the large sample distributions of lagrange multiplier lm tests for parameter instability against several alternatives of interest in the context of cointegrated regression models the fully modified estimator of phillips and hansen is extended to cover general models with stochastic and deterministic trends the test statistics considered include the supf test of quandt as well as the lm tests of nyblom and of nabeya and tanaka it is found that the asymptotic distributions depend on the nature of the regressor processes that is if the regressors are stochastic or deterministic trends the distributions are noticeably different from the distributions when the data are weakly dependent it is also found that the lack of cointegration is a special case of the alternative hypothesis considered an unstable intercept so the tests proposed here may also be viewed as a test of the null of cointegration against the alternative of no cointegration the tests are applied to three data se

policy options to improve the effectiveness of the eu emissions trading system a multi criteria analysis abstract this paper considers several policy options which have been proposed to improve the functioning of the ets these options require an intervention either on the ets cap 30 target set aside carbon central bank long term target or on the carbon price european and national price floor we analyse the impact of each policy on the ets carbon price and emissions a multi criteria evaluation method is applied to compare the policy options against a plurality of environmental economic and procedural criteria we find that the final ranking depends on the goals to be achieved i e the relative weights attributed to the criteria when policymakers want mainly to support the carbon price both in the short and long run while improving ets flexibility and harmonization the ccb and the eu price floor are respectively ranked as first and second best options as the preference for environmental and implementation goals gradually increases the position of the eu price floor and ccb options tend to invert the 30 target should be adopted when reducing emissions is the priority goal while a national price floor is the worst option in this case nevertheless self interested states looking for a relatively quick feasible solution may find it optimal

an equilibrium model of consumer energy choice using a personal carbon trading scheme based on allowance price abstract changes in consumer behavior due to a personal carbon trading pct scheme are theoretically attractive yet untested in practice in this paper simulations on the basis of an equilibrium model are used to examine the effects of carbon allowance prices on energy use choice under a particular pct scheme it is shown that the equilibrium price of allowances would emerge under the pct scheme considered here further analyses indicate that the quantity of energy consumption under pct is a nonlinear function of the allowance price with a sharp kink at the point of equilibrium when the allowance price is below the equilibrium price consumers would prefer higher carbon energy in contrast when the allowance price is above the equilibrium price consumers would choose lower carbon energy however when the allowance price equals the equilibrium value consumers would purchase lower carbon energy and higher carbon energy simultaneously furthermore it is shown that the initial allowance allocation could also affect energy use choice on the basis of these results one of the main implications is that the allowance price should exceed the breakeven price to stimulate consumers to switch to green energy and progressively live a low carbon lifestyle

impact of renewables deployment on the co2 price and the co2 emissions in the european electricity sector abstract as of 2005 electricity generators in europe operate under the european union emission trading system eu ets at the same time european member states have launched support mechanisms to stimulate the deployment of renewable electricity sources res e res e injections displace co 2 emissions within the sectors operating under the eu ets and they reduce the demand for european union allowances euas thereby reducing the eua price this paper presents the results of an ex post analysis to quantify the impact of res e deployment on the eua price and co 2 emissions in the western and southern european electricity sector during the period from 2007 to 2010 following from an operational partial equilibrium model of the electricity sector this study shows that the co 2 displacement from the electricity sector to other ets sectors due to res e deployment can be up to more than 10 of historical co 2 emissions in the electricity sector the eua price decrease caused by res e deployment turns out to be likely significant

an econometric analysis of emission allowance prices knowledge of the statistical distribution of the prices of emission allowances and their forecastability are crucial in constructing among other things purchasing and risk management strategies in the emissions constrained markets this paper analyzes the two emission permits markets co2 in europe and so2 in the us and investigates a model for dealing with the unique stylized facts of this type of data its effectiveness in terms of model fit and out of sample value at risk forecasting as compared to models commonly used in risk forecasting contexts is demonstrated

an analysis of the decline of electricity spot prices in europe who is to blame abstract the european electricity markets are going through a phase of agitating transition which is shaped by different key factors such as the expansion of renewable energies the changes in the eu carbon trading scheme and the european market integration in addition markets are affected by the volatile prices of primary energy carriers e g gas and coal the development of these different factors led to a decline of german wholesale electricity prices of almost 40 from about 51 mwh in 2011 to 31 mwh in 2015 the goal of this study is to analyze the contribution of different price drivers to this decline thus an agent based modeling and a regression approach are applied to investigate the effect of price drivers and to verify model results by comparing both approaches our results show that against the public perception the impact of carbon and coal prices on german electricity prices has been twice as high as the renewable expansion between 2011 and 2015 furthermore if carbon and coal prices do not recover to at least the level of 2011 electricity prices will remain on the current low level complicating the economic operation of gas power plants

the response of the beijing carbon emissions allowance price bjc to macroeconomic and energy price indices in 2013 china opened pilot carbon emission trading markets in seven provinces where carbon emission allowances have now been traded for more than two years in this paper we employ a structural var model and the price of the beijing carbon emission allowance to study the dynamic relationships among the price of the carbon emission allowance economic development and the price of energy this paper s data cover the period from april 2 2014 to november 6 2015 this paper provides information that will be helpful to both investors and governmental policy makers the results show that 1 an increase of one standard deviation in the coal price leads to an initial increase of approximately 0 1 in the beijing carbon price after 2 days there is a decrease of less than 0 1 and the price gradually increases by approximately 0 1 after 30 days 2 the price of the beijing carbon emission allowance is mainly affected by its own historical price 3 the beijing carbon emission allowance price crude oil price natural gas price and economic development have positive albeit non significant correlations

the impact of intraday markets on the market value of flexibility decomposing effects on profile and the imbalance costs abstract an increasing share of variable renewable energy sources vres basically affects the electricity price formation in two ways 1 the so called merit order effect tends to lower the base price level and challenges conventional plants to remain profitable 2 due to the variable nature of renewable energy infeed the short term demand for flexibility increases and changes the volatility of electricity prices the more variable prices offer opportunities for controllable electricity producers ceps who provide up and down ramping flexibility to increase their revenues in contrast the vres with high degrees of simultaneity tend to pay for this flexibility in the electricity spot market to reduce their imbalance exposure the intraday market idm for electricity has gained importance for the market value of different technologies lately and continues to expand due to the increasing efforts to balance within day deviation from day ahead schedules this article presents a combination and extension of two existing models to capture the peculiarities of the intraday price formation and to analyze the impact of the idm on the market value of vres and ceps doing so the paper suggests an adjustment of the classical market value factor metric and to go beyond classical day ahead market dam information the article shows that market value factors mvfs can be stabilized if the idm delivers market based price signals for the costs of flexibility that are sufficient to activate flexibilities prior to the usually more expensive imbalance mechanism ibm yet the mvfs from single vre technologies will worsen if their market share is high enough to outweigh forecast errors from other technologies and if they become a permanent price maker in the idm and the ibm

regulation by prices quantities or both a review of instrument choice choosing appropriate policy instruments is an important part of successful regulation once objectives are agreed and suitable targets adopted policy makers can employ command and control regulation and or economic instruments and choose between fixing a price or a quantity this paper examines the relative advantages of price quantity and hybrid instruments according to their efficiency under uncertainty the trade off between credible commitment and flexibility implementation international considerations and political economy various illustrations of the theory are provided with two detailed applications to climate change and transport policy specifically congestion and safety pricing

politics matters regulatory events as catalysts for price formation under cap and trade this paper investigates how the political process of making cap adjustments has shaped market outcomes in the world s largest cap and trade system the eu ets capitalizing on an event study method that incorporates an econometric technique designed to handle parameter instability and model uncertainty we assess the news implied price response to 29 hand collected announcements about the eu ets supply schedule our findings document a high market responsiveness to political events and reveal how market participants view the evolution of cap stringency in the light of a particular announcement we provide evidence that a sequence of strong event induced price drops evolve in the backloading decision process which is consistent with the interpretation that market participant s confidence in the political support for reform and probably the eu ets in general has been unsettled we also document positive price reactions to the 2020 and 2030 policy packages but not the 2050 roadmaps

dynamic linkages among carbon energy and financial markets a smooth transition approach this article explores how price linkages between carbon allowances and market fundamentals in the eu emissions trading scheme eu ets vary over time i adopt a multivariate garch model that allows the conditional correlation between carbon energy and financial prices to change smoothly across regimes governed by functions of two transition variables that explain why price linkages vary i use i time as transition variable to allow for structural changes associated with institutional advances in the eu ets and ii implied volatility to account for heterogeneity in the behaviour of correlations in times of distress compared to calm periods the results point to a new pricing regime with much closer carbon energy price linkages in the second phase of the eu ets furthermore i find that correlations depend on market uncertainty conditions which exposes the link between carbon and financial markets due to common macroeconomic shocks during the current financial crisis

on the economics of renewable energy sources abstract with the global expansion of renewable energy re technologies the provision of optimal re policy packages becomes an important task we review pivotal aspects regarding the economics of renewables that are relevant to the design of an optimal re policy many of which are to date unresolved we do so from three interrelated perspectives that a meaningful public policy framework for inquiry must take into account first we explore different social objectives justifying the deployment of re technologies and review model based estimates of the economic potential of re technologies i e their socially optimal deployment level second we address pivotal market failures that arise in the course of implementing the economic potential of re sources in decentralized markets third we discuss multiple policy instruments curing these market failures our framework reveals the requirements for an assessment of the relevant options for real world decision makers in the field of re policies this review makes it clear that there are remaining white areas on the knowledge map concerning consistent and socially optimal re policies

price drivers and structural breaks in european carbon prices 2005 2007 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 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 allows to isolate distinct fundamentals evolving overtime the results extend previous literature by showing that eua spot prices react not only to energy prices with forecast errors but also to unanticipated temperatures changes during colder events besides the sub period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes

cointegration and structural change an application to the u s demand for money wankeun oh i perform the cointegration tests for the trivariate model of real monetary aggregates real personal income and short term interest rate i find the existence of a long run relationship among these three variables to check the stability of a long run money demand relationship i implement a rank constancy test and cusum test the test results show that real mi is relatively more stable than other aggregates but structural change occurred during the 1970s and early 1980s this is consistent with prior research on money demand jel e41 i introduction incorporating structural change when performing tests on the properties of stochastic processes is important because structural breaks may cause misspecification problems most tests of structural change consider the stability of the parameters over time tests for structural breaks and parameter stability have been studied extensively a partial list includes chow 1966 brown et al 1975 harvey and collier 1977 king 1987 ploberger et al 1989 in the context of unit root processes perron 1989 showed that the presence of a one time change in the level or slope of the trend function can severely distort the results of unit root tests and it is natural to ask how structural change can distort the results of cointegration tests 1 traditional tests of parameter stability ask if the parameters of the model are constant in contrast quintos 1993 proposed a test for stability of the long run relationship s in a cointegrating regression the test is based on johansen s 1988 framework and the test statistic is simply the weighted sum of the likelihood ratio test as given in johansen 1988 quintos s rank test is very different from the traditional cusum and chow tests for parameter stability because her rank test checks for stability of the cointegrating relationship between variables in other words the rank test checks whether cointegration holds for the full period the traditional cusum and chow tests assume that cointegration holds for the full period or does not hold for the full period and tests simply whether the cointegration vector changes for example if there is cointegration from 1960 1990 between revenues and expenditures with cointegrating vector 1 1 then the cusum and chow tests check whether the cointegra ting vector 1 1 is stable throughout the period the rank constancy test checks whether the cointegration rank is stable throughout the period not whether the cointegrating vector is stable at 1 1 in other words the rank test will check whether for example there is cointegration from 1960 1980 and no cointegration from 1980 onward the chow and cusum tests are not designed to check for this the structural stability of money demand relationships has been the issue of a substantial number of empirical studies 2 in general structural stability means stability of the underlying behavioral equations 3 this term includes parameter stability and stability of functional form friedman s 1990 research on the money demand function assumes that a long run equilibrium relationship exists between real money balances real income or real wealth and the opportunity cost of holding real money balances recently there has been strong evidence of cointegration between real income real money balances and a nominal interest rate for instance engle and granger 1987 dickey et al 1991 hafer and jansen 1991 hoffman and rasche 1991 mehra 1993 miller 1991 fischer and nicoletti 1993 and baba et al 1992 report on cointegration among variables in u s aggregate money demand jain and moon 1994 report on cointegration in u s sectoral money demand yashiv 1994 and engsted 1993 on money demand in a high inflation country and hoffman et al 1995 report on international money demand comparison this article asks if long run money demand relationship is stable and if so for which measure of money is it stable over time

an emerging equilibrium in the eu emissions trading scheme 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 co 2 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

is renewable energy a cost effective mitigation resource an application to the spanish electricity market abstract this paper evaluates the net effect of renewable energy policy in spain from 2002 to 2017 and calculates its cost effectiveness in terms of co2 emission reductions in the production of electricity our conclusions indicate that although the phasing out of feed in tariffs reduced the regulatory costs it also limited renewable participation in the electricity market leading to an increased electricity price and higher emissions according to our results the joint effect of i the value of avoided emissions due to renewable energy participation and ii the merit order effect was able to compensate for the regulatory costs subsidies up until 2010 while the sign of the net effect was reversed from 2011 to 2017 finally we find that the economic implications of emission reductions are highly dependent on how the social cost of carbon is measured

co2 abatement from renewables in the german electricity sector does a co2 price help abstract the overlapping impact of the emission trading system ets and renewable energy re deployment targets creates a classic case of interaction effects whereas the price interaction is widely recognized and has been thoroughly discussed the effect of an overlapping instrument on the abatement attributable to an instrument has gained little attention this paper estimates the actual reduction in demand for european union allowances that has occurred due to re deployment focusing on the german electricity sector for the five years 2006 through 2010 based on a unit commitment model we estimate that co 2 emissions from the german electricity sector are reduced by 35 to 60 mtons or 10 to 18 of what estimated emissions would have been without any re policy but with the co 2 price remaining in place at the observed level furthermore we find that the abatement attributable to re injections is greater in the presence of an allowance price than otherwise the same holds for the ets effect in presence of re injection this interaction effect is consistently positive for the german electricity system at least for the considered years and on the order of 0 5 to 1 5 of emissions

a model of intertemporal emission trading banking and borrowing abstract this paper provides a general treatment of emission trading banking and borrowing in an intertemporal continuous time model using optimal control theory the decentralized behavior of firms is shown to lead to the least cost solution attainable under joint cost minimization explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits the policy implications of emission banking and borrowing are discussed

emissions trading systems with cap adjustments abstract emissions trading systems etss with fixed caps lack provisions to address systematic imbalances in the supply and demand of permits due to changes in the state of the regulated economy we propose a mechanism which adjusts the allocation of permits based on the current bank of permits the mechanism spans the spectrum between a pure quantity instrument and a pure price instrument we solve the firms emissions control problem and obtain an explicit dependency between the key policy stringency parameter the adjustment rate and the firms abatement and trading strategies we present an analytical tool for selecting the optimal adjustment rate under both risk neutrality and risk aversion which provides an analytical basis for the regulator s choice of a responsive ets policy

what happens to the relationship between eu allowances prices and stock market indices in europe abstract the stock market may reflect the economic conditions of an economy and a positive economic situation is expected to improve the companies profits which makes company shares more attractive since the expected dividends to shareholders will be larger theoretically higher economic activity leads to higher energy demand and consequently higher carbon emissions which give rise to higher eu allowances eua prices therefore the stock market and eua prices seem to be connected with causality going from the stock markets to eua prices this paper formally tests for it showing that the causality effectively runs from the stock market to the european climate exchange market furthermore the paper studies the effects of the evolution of european stock markets on the eua spot prices

allowance price drivers in the first phase of the eu ets abstract in the first phase of the eu emissions trading scheme eu ets the price per ton of co 2 initially rose to over 30 the price then collapsed to essentially zero by mid 2007 by deriving a structural model of the allowance price under the assumption of efficient markets i examine the extent to which this variation in price can be explained by marginal abatement costs i then gradually relax the model by allowing for delayed adjustment of price to fundamentals as well as by introducing lagged lhs variables the pattern of results suggests that while prices were not initially driven by marginal abatement costs this inefficiency was largely corrected after the accounting of 2005 emissions in april 2006

consignment auctions of free emissions allowances abstract while the initial distribution of emissions allowances is usually thought to be independent of the emissions outcome free allocation can affect the efficiency and fairness of allowance trading inefficiency may result from thin allowance markets poor price discovery and regulatory or organizational complexities that hinder the recognition of opportunity costs concerns about fairness may result from intransparency in the process of transferring substantial allowance value we explore the role of consignment auctions in mitigating these concerns these revenue neutral auctions return the financial value of allowances to their original holders while revealing prices and directing allowances to their highest valued use they also can be used to support a minimum price when allowances are freely distributed which may facilitate program linkage consignment auctions have minimal administrative costs and do not necessarily involve government experience indicates that they can play an important role especially in new markets

impacts of a common green certificate market on electricity and co2 emission markets in the nordic countries abstract the purpose of this study is to analyze the effects of introducing a common nordic system for tradable green certificates tgcs on the electricity market and a future market for tradable co 2 emission permits teps in the analysis the energy system model generator markal was used to model the electricity and district heating supply systems in the four nordic countries sweden norway finland and denmark it is shown that the introduction of tgc quotas reduces wholesale electricity and tep prices the impact on the latter is very pronounced retail electricity prices may become lower or higher depending on the tgc quota than if obligations to fulfill tgc quotas were absent the tgc scheme s efficiency in reducing a specific amount of co 2 emissions is also compared to the corresponding efficiency of a tep scheme involving a broader range of technologies furthermore obligations to fulfill tgc quotas affect investment incentives for new non renewable electricity supply this seems especially true for gas fired power plants finally it is indicated that electricity supply based on biomass combustion dominates the tgc scheme at least in the short run

causes of the eu ets price drop recession cdm renewable policies or a bit of everything new evidence the price of eu allowances euas in the eu emissions trading scheme eu ets fell from almost 30 tco2 in mid 2008 to less than 5 tco2 in mid 2013 the sharp and persistent price decline has sparked intense debates both in academia and among policy makers about the decisive allowance price drivers in this paper we examine whether and to what extent the eua price drop can be justified by three commonly identified explanatory factors the economic recession renewable policies and the use of international credits capitalizing on marginal abatement cost theory and a broadly extended data set we find that only variations in economic activity and the growth of wind and solar electricity production are robustly explaining eua price dynamics contrary to simulation based analyses our results point to moderate interaction effects between the overlapping eu ets and renewable policies the bottom line however is that 90 of the variations of eua price changes remains unexplained by the abatement related fundamentals together our findings do not support the widely held view that negative demand shocks are the main cause of the weak carbon price signal in view of the new evidence we evaluate the eu ets reform options which are currently discussed

soft and hard price collars in a cap and trade system a comparative analysis we use a stochastic dynamic framework to compare price collars price ceilings and floors in a cap and trade system with uncertainty in the level of baseline emissions and costs we consider soft collars which provide limited volume of additional emission allowances a reserve at the price ceiling and hard collars which provide an unlimited supply of additional allowances thereby preventing allowance prices from exceeding the price ceiling conversely allowances are removed from the market if prices fall to the floor we find that increasing the size of the reserve strictly lowers expected net present values of compliance costs however there is a diminishing effect as the allowance reserve is expanded most of the expected cost savings are achieved with a modest reserve consequently a rather limited soft price collar could provide considerable assurance about cost while preventing the possibility that emissions could spiral out of control

carbon price drivers phase i versus phase ii equilibrium abstract the aim of this paper is to investigate the determinants of the carbon price during the two phases of the european union emission trading scheme eu ets more specifically relying on daily eu allowance futures contracts we test whether the carbon price drivers identified for phase i still hold for phase ii and evolve toward a long run relationship using cointegration techniques and accounting for the 2006 structural break in the carbon market we show that while a cointegrating relationship exists for both phases of the eu ets the nature of this equilibrium relationship is different across the two subperiods with an increasing role of fundamentals in phase ii deriving equilibrium values we show that the carbon price tends to be undervalued since the end of 2009

a multiscale analysis for carbon price drivers abstract this study proposes a multiscale analysis model to explore and identify the carbon price drivers at different timescales by introducing the latest multivariate empirical mode decomposition carbon price and its potential drivers are decomposed into several groups of simple modes with specific economic meanings the cointegration techniques error correction model and newey west estimator are combined to capture the carbon price drivers at similar timescales illustrated by the samples of the european union emissions trading system from 2009 to 2016 a few interesting results can be found that at the original data level among the three most important drivers of carbon price electricity price and stock index show positive impacts while coal price shows a negative impact at different timescales the effects of electricity and stock index appear comparatively earlier which drive carbon price from the short timescales and continue to strengthen however the impacts of coal oil and gas prices are lagging behind which respectively drive the carbon price at the medium and long timescales

covid 19 tests the market stability reserve we compare the decrease in energy demand and co2 emissions in europe during the financial crisis 2008 2009 with the expected drop in demand and emissions due to covid 19 and the price response of the eu emission trading system eu ets we ask whether the rather limited current price reduction may be due to the market stability reserve msr implemented in the eu ets between the two crises stylized facts and basic theory are complemented with simulations based on a model of the eu ets together they suggest a mixed result the msr stabilizes the eu ets price in turbulent times but imperfectly we show that the more persistent the covid 19 shock is the less the msr is able to serve its purpose

economic performance through time prize lecture to the memory of alfred nobel december 9 1993 this abstract was borrowed from another version of this item

the market microstructure of the european climate exchange abstract this paper analyzes the market microstructure of the european climate exchange the largest eu ets trading venue the ecx captures 2 3 of the screen traded market in eua and more than 90 in cer volume growth has averaged 277 in eua between 2005 and 2009 and 724 in cer since 2007 spreads range from 0 0188 to 0 0406 for eua and 0 0276 to 0 0796 for cer the median proportion of the spread due to adverse selection reaches 76 for eua and 75 for cer realized volatility bid ask spreads and adverse selection costs decline with verified emission releases market impact estimates imply that an average trade will move the eua market by 1 06 euro centimes and the cer market 1 45 the ecx is providing between 75 and 88 of price discovery for eua trading and between 64 and 72 for cer we find imbalances in the order book help predict returns for up to three days a simple trading strategy that enters the market long or short when the order imbalance is strong is profitable even after accounting for spreads and market impact

a model of carbon price interactions with macroeconomic and energy dynamics abstract this paper develops a model of carbon pricing by considering two fundamental drivers of european union allowances economic activity and energy prices on the one hand economic activity is proxied by aggregated industrial production in the eu 27 as it provides the best performance in a preliminary forecasting exercise vs other indicators on the other hand brent natural gas and coal prices are selected as being the main carbon price drivers as highlighted by previous literature the interactions between the macroeconomic and energy spheres are captured in a markov switching var model with two states that is able to reproduce the boom bust business cycle hamilton 1989 first industrial production is found to impact positively negatively the carbon market during periods of economic expansion recession thereby confirming the existence of a link between the macroeconomy and the price of carbon second the brent price is confirmed to be the leader in price formation among energy markets bachmeier and griffin 2006 as it impacts other variables through the structure of the markov switching model taken together these results uncover new interactions between the recently created eu emissions market and the pre existing macroeconomic energy environment

looking under the hood exploring assumptions and finding behavioral economics abstract cognitive scarcity is a fundamental economic fact but the standard maximization assumption abstracts from this fact much of behavioral economics can be framed as exploring the maximization assumption by applying the tools of behavioral economics to explore this important assumption we can learn why presuming maximization works when it works even when we know the assumption is not accurately descriptive we can also learn why theory fails when the assumption does not proximately hold

emissions trading in china emerging experiences and international lessons grants by the robert bosch foundation under the program sustainable partners partners for sustainability the australian research council and the australian government supported different parts of the project

eua and scer phase ii price drivers unveiling the reasons for the existence of the eua scer spread abstract this article studies the price relationships between eu emissions allowances euas valid under the eu emissions trading scheme eu ets and secondary certified emissions reductions scers established from primary cers generated through the kyoto protocol s clean development mechanism cdm given the price differences between euas and scers financial and industrial operators may benefit from arbitrage strategies by buying scers and selling euas i e selling the eua scer spread to cover their compliance position as industrial operators are allowed to use scers towards compliance with their emissions cap within the european system up to 13 4 our central results show that the spread is mainly driven by eua prices and market microstructure variables and less importantly as we would expect by emissions related fundamental drivers this might be justified by the fact that the eu ets remains the greatest source of cer demand to date

impact of the economic recession on the european power sector s co2 emissions abstract this paper investigates the impact of the economic recession on co 2 emissions in the european power sector during the years 2008 and 2009 three main determinants of the power sector s emissions are identified the demand for electricity the co 2 price and fuel prices a counterfactual scenario has been set up for each of these i e what these parameters would have been if not affected by the recession a simulation model of the european power sector is then employed comparing a historical reference simulation taking the parameters as actually occurred with the counterfactual scenarios the lower electricity demand due to the recession is shown to have by far the largest impact accounting for an emission reduction of about 175 mton the lower co 2 price due to the recession resulted in an increase in emissions by about 30 mton the impact of fuel prices is more difficult to retrieve an indicative reduction of about 17 mton is obtained mainly as a consequence of the low gas prices in 2009 the simulated combined impact of the parameters results in an emission reduction of about 150 mton in the european power sector over the years 2008 and 2009 as a consequence of the recession

services sector and economic growth in india this study examines the long run equilibrium and short run dynamic relationship between services sector and gross domestic product gdp and between services and nonservices sectors in india the model is estimated using the optimal single equation and the maximum likelihood system estimators all the estimators consistently suggest the cointegrating relationship between services sector and gdp as well as between services and nonservices sectors the estimates of long run elasticity parameters are statistically significant and dimensionally consistent across the estimators the conventional cumulative sum cusum and the new cusum and moving sum mosum tests suggest the stability of the equilibrium residuals and reinforce the cointegrating relationship between the model series the error correction model provides some support for unidirectional granger causality from services sector to gdp the impulse response and variance decomposition analyses instead suggest the bidirectional causality between servic

what ails the european union s emissions trading system abstract the european union has adopted economists idea of curbing carbon emissions by establishing markets where bankable emissions allowances can be traded implicit in proofs that cap and trade minimizes the expected discounted cost of capping emissions however is that the regulator not intervene once the market is established otherwise market participants encounter uncertainties beyond what a social planner faces this paper discusses the equilibrium that results when private agents bank tradable allowances in the face of ongoing risk of future regulatory intervention and shows that the cap will be achieved at unnecessarily high cost even if no regulatory intervention actually occurs evidence that such risks are currently distorting eu ets comes from the depressed current spot price from the findings of schopp and neuhoff 2014 that speculators require multiples of the riskless rate of interest to bank permits and from the sensitivity of prices to votes and announcements about proposed future regulatory changes

procrastinating reform the impact of the market stability reserve on the eu ets abstract we study the impact of the market stability reserve msr on price and emission paths of the eu ets from 2019 onwards the msr will adjust the number of allowances auctioned as a function of the size of the surplus i e in times of a large surplus it shifts the issue date of allowances into the future in a perfectly competitive allowance market the msr only affects price and emission paths if the baseline equilibrium becomes unfeasible if the msr is binding prices increase in the short run but drop in the medium run relative to the baseline the msr increases price variability if uncertainty over future allowance demand is resolved while there is a surplus the long run cap is unaffected by both the msr and overlapping climate policies this contrasts the eu s objectives of improving the resilience of the eu ets and increasing synergies with overlapping climate policies

diagnostic test for structural change in cointegrated regression models abstract we derive the asymptotic distribution of the ols based cusum test in the context of cointegrated regression models and tabulate its critical values it is also found that the test has non trivial local power irrespective of the particular type of structure change

asymmetric risk spillover between financial market uncertainty and the carbon market a gas dcs copula approach abstract a thorough understanding the asymmetry in risk transferring mechanisms remains a challenge in the carbon market through the incorporation of the asymmetric tail distribution into the risk transferring mechanism the asymmetric response of the carbon market to financial market uncertainties can be explored herein we propose a generalized autoregressive score dynamic conditional score copula model to investigate the asymmetric risk spillover between financial market uncertainty and the carbon market we discover the existence of considerable asymmetric risk spillover from financial market uncertainty to the carbon market specifically the upper tail risk spillover effect is greater than the lower tail risk spillover effect the degree of risk spillover reached a peak during the european debt crisis also higher degrees of financial market uncertainty and especially uncertainty from the crude oil market cause a greater risk spillover to the carbon market than lower degrees of financial market uncertainty do in addition we discover that stock market uncertainty exhibits greater power than crude oil market uncertainty in transferring risk to the carbon market when systemic events occur our research provides meaningful information to investors and policy makers

eu ets emissions under the cancellation mechanism effects of national measures abstract beginning in 2023 allowances held in the market stability reserve of the eu ets above the number of allowances auctioned the previous year will be cancelled in this paper we analyse the consequences of this new cancellation mechanism using numerical analysis we show that additional national abatement measures now have the potential to reduce total eu ets emissions a key insight is that for this to happen domestic emission reductions must occur early how early depends crucially on how the future demand for allowances evolve to facilitate an understanding of the rather complex system the reformed eu ets constitutes we present a series of extensions to the analysis to show how the results are affected by for example future emission levels technological development optimising agents and speculative trading in allowances

estimation of time varying price elasticity in 1970 1997 japanese raw milk supply by structural time series model the price elasticity of raw milk supply in japan is estimated over time by a structural time series model in state space form and the changes in elasticity are tested by the diagnosing test of de john and penzer in 1998 the supply function is modeled with a local linear trend and a strictly exogenous autoregressive distributed lag price the seasonality in the data is adjusted by a structural time series model in the 1970 1997 period there were major dairy policy changes in japan a production adjustment related penalties and two tier pricing hokkaido is the region that mainly provides the supply of raw milk for milk products while tofuken is the region that mainly produces drinking milk the estimated price elasticity in hokkaido became stable after imposition of the production adjustment on the other hand price elasticity in tofuken became stable after the inflation of the mid 1970s price elasticity is estimated to be more inelastic as well as more likely to converge in inelasticity in hokkaido than in tofuken we discuss the relationship between changes in dairy policy and changes in price elasticity