A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors

Vlad-Cosmin Bulai, Alexandra Horobet, Oana Popovici, Lucian Belascu and Sofia Adriana Dumitrescu
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Vlad-Cosmin Bulai: Department of International Business and Economics, Bucharest University of Economic Studies, 010374 Bucharest, Romania
Alexandra Horobet: Department of International Business and Economics, Bucharest University of Economic Studies, 010374 Bucharest, Romania
Lucian Belascu: Department of Management, Marketing and Business Administration, “Lucian Blaga” University of Sibiu, 550024 Sibiu, Romania
Sofia Adriana Dumitrescu: Department of Accounting and Audit, Bucharest University of Economic Studies, 010374 Bucharest, Romania

Energies, 2021, vol. 14, issue 24, 1-21

Abstract: The latest European Union measures for combating climate adopted in the “Fit for 55 package” envisage the extension of the Emissions Trading System, the first “cap-and-trade” system in the world created for achieving climate targets, which limits the amount of greenhouse gas emissions by imposing a price on carbon. In this context, our study provides an integrated assessment of carbon price risk exposure of all economic sectors in the European Union Member States, thus supporting decision making in determining the energy transition risk. We propose a novel approach in assessing carbon risk exposure using the Value at Risk methodology to compute the carbon price under the EU ETS, based on historical price simulation for January–August 2021 and ARMA-GARCH models for the October 2012–August 2021 period. We further built a value erosion metric, which allowed us to establish each sector’s exposure to risk and to identify differences between Eastern and Western EU countries. We find that the refining sector appears to be highly vulnerable, whereas there is higher potential for large losses in the energy supply and chemical sectors in Eastern EU Member States, given a different pace of industry restructuring.

Keywords: carbon price risk; greenhouse gas emission; European Trade System; Value at Risk; ARMA-GARCH; European Union (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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