Bubble in Carbon Credits during COVID-19: Financial Instability or Positive Impact (“Minsky” or “Social”)?

Bikramaditya Ghosh, Spyros Papathanasiou, Vandita Dar and Konstantinos Gravas
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Bikramaditya Ghosh: Symbiosis Institute of Business Management, Symbiosis International (Deemed University) Electronic City, Hosur Road, Bengaluru 560100, India
Vandita Dar: Symbiosis Institute of Business Management, Symbiosis International (Deemed University) Electronic City, Hosur Road, Bengaluru 560100, India
Konstantinos Gravas: Department of Banking and Financial Management, School of Finance and Statistics, University of Piraeus, 80 M. Karaoli & A. Dimitriou Street, 18534 Piraeus, Greece

JRFM, 2022, vol. 15, issue 8, 1-16

Abstract: Incentivizing businesses to lower carbon emissions and trade back excess carbon allowances paved the way for rapid growth in carbon credit ETFs. The use of carbon allowances as a hedging alternative fueled this rally further, causing a shift to speculation and forming repetitive bubbles. Speculative bubbles are born from euphoria, yet, they are relatively predictable, provided their pattern matches the log periodic power law (LPPL) with specific stylized facts. A “Minsky moment” identifies a clear speculative bubble as a signal of financial system instability, while a “Social bubble” is regarded as relatively positive, increasing in the long run, infrastructure spending and development. The aim of this paper is to investigate whether various carbon credit bubbles during the pandemic period caused financial instability or had a positive impact (“Minsky” or “Social”). Particularly, we investigate the carbon credit bubble behavior in the ETF prices of KRBN, GRN (Global Carbon Credit tracking ETFs), and the SOLCARBT index during the COVID-19 pandemic period by adopting the log-periodic power law model (LPPL) methodology, which has been widely used, over the past decade, for detecting bubbles and crashes in various markets. In conclusion, these bubbles are social and propelled by the newfound interest in carbon credit trading, for obvious reasons.

Keywords: green finance; green energy; COVID-19; carbon credit; log periodic power law; social bubble hypothesis; COVID-19 (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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