Politics matters: Regulatory events as catalysts for price formation under cap-and-trade

Nicolas Koch, Godefroy Grosjean, Sabine Fuss and Ottmar Edenhofer

Journal of Environmental Economics and Management, 2016, vol. 78, issue C, 121-139

Abstract: 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.

Keywords: Cap-and-trade; EU ETS; Allowance supply; Political uncertainty; Event study; Bayesian (search for similar items in EconPapers)
JEL-codes: C53 G14 Q54 Q58 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:78:y:2016:i:c:p:121-139

DOI: 10.1016/j.jeem.2016.03.004

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