The Emissions Trading Scheme of the European Union is a central instrument of EU's climate policy. Looking at the development of allowance prices shows that prices have been low for a long time and previous research indicates that a link to fundamental price drivers is hard to establish. Only recently, prices have started to increase. This new price development has received a lot of attention in political discussions in which it has been attributed to the recent reformof the EU ETS -- the strengthening of the Market Stability Reserve through cancellation. It is, however, challenging to find empirical evidence which can link the two, or more generally, to provide evidence about the true cause of the upward trend. In this paper , we obtain first empirical results pointing in the direction of a period of exuberance in EUA prices . This period overlaps with the recent upward trend in prices. We further investigate several abatement-related fundamentals and show that they do not display explosive behavior which could have driven the allowance price movements. We conjecture that this price exuberance could either be caused by an adaption process or an overreaction of prices to the announcement of the reform. In addition, we revisit the effects of fundamental price drivers, such as coal prices, gas prices and measures of economic activity, on allowance prices in the EU ETS using a time-varying coefficient regression model .
In 2017 allowance prices in the EU Emissions Trading Scheme (ETS) have started to rally from persistently low levels in previous years. Market observers attribute this development to the ETS reform, naming anticipation of the tightening of allowance supply through the Market Stability Reserve (MSR) and speculative buying as main price drivers. The former suggests an increasing role of fundamentals, while the latter could give rise to investor overreaction and mispricing. Analyzing the price run up using the anticipative dating algorithm by Phillips et al. (2015) , we obtain first empirical results that detect explosive behavior in prices from February 2018 on. Such behavior could reflect an adaption process , or be an indicator for market exuberance during the inflationary phase of a bubble. Testing for the former, we neither find that abatement-related fundamentals display equally explosive behavior, nor a change in coefficients using a complementary time-varying non-parametrical regression model. Finally, we examine the two potential explanations from a theoretical angle to shed light on candidate underlying mechanisms. We conclude that no explanation can be ruled out, but further research is needed to increase confidence in either .
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The
In 2017 allowance prices in the EU
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of the European Union is a central instrument of EU's climate policy. Looking at the development of allowance prices shows that prices have been low for a long time and previous research indicates that a link to fundamental price drivers is hard to establish. Only recently, prices have started to increase. This new price development has received a lot of attention in political discussions in which it has been attributed to the recent reformof
(ETS) have started to rally from persistently low levels in previous years. Market observers attribute this development to
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EU ETS -- the strengthening of
ETS reform, naming anticipation of the tightening of allowance supply through
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through cancellation. It is, however, challenging to find empirical evidence which can link the two, or more generally, to provide evidence about the true cause of the upward trend. In this paper
(MSR) and speculative buying as main price drivers. The former suggests an increasing role of fundamentals, while the latter could give rise to investor overreaction and mispricing. Analyzing the price run up using the anticipative dating algorithm by Phillips et al. (2015)
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pointing in the direction of a period of exuberance in EUA prices . This period overlaps with the recent upward trend in prices. We further investigate several abatement-related fundamentals and show that they do not display explosive behavior which could have driven the allowance price movements. We conjecture that this price exuberance could either be caused by
that detect explosive behavior in prices from February 2018 on. Such behavior could reflect
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or an overreaction of prices to the announcement of the reform. In addition, we revisit the effects of fundamental price drivers, such as coal prices, gas prices and measures of economic activity, on allowance prices in the EU ETS using a
, or be an indicator for market exuberance during the inflationary phase of a bubble. Testing for the former, we neither find that abatement-related fundamentals display equally explosive behavior, nor a change in coefficients using a complementary
R
coefficient regression model
non-parametrical regression model. Finally, we examine the two potential explanations from a theoretical angle to shed light on candidate underlying mechanisms. We conclude that no explanation can be ruled out, but further research is needed to increase confidence in either