Trade, equilibrium prices and rents in European auctions for emission allowances

Bruno Bosco ()
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Bruno Bosco: DEMS University of Milan-Bicocca

Environmental Economics and Policy Studies, 2023, vol. 25, issue 1, No 4, 87-113

Abstract: Abstract This paper analyzes the price behavior of Phase III (2013–2020) EU-ETS emission allowances of CO2 by focusing on the dynamics of daily auction equilibrium prices and on the changes of the volatility of the underlying stochastic process. The paper derives the main testable statistical hypotheses (particularly that about the determinants of the conditional variance of prices) on the results derived in a model of optimal bidders’ behavior given the ETS auction rules. Tests are conducted by estimating various versions of GARCH models for both mean and variance equations of price return. Results show that the price dynamics is affected by factors including a measure of excess demand/offer and the number of winning bidders and that, contrary to expectations, reforms of the auction rules introduced at the end of Phase III explain a great part of the increased price volatility. The increased volatility is also positively associated with the bid spread and negatively associated with the number of bidders active in each auction round.

Keywords: EU-ETS emission auctions; Equilibrium prices volatility; GARCH models (search for similar items in EconPapers)
JEL-codes: C32 D44 Q31 Q52 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10018-022-00344-y

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