Cleaning the carbon market! Market transparency and market efficiency in the EU ETS

Iordanis Angelos Kalaitzoglou ()
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Iordanis Angelos Kalaitzoglou: Audencia Business School, (Ma)Rkets, (Te)Chnology and (S)Ociety Research Center

Annals of Operations Research, 2025, vol. 347, issue 1, No 20, 533 pages

Abstract: Abstract This paper revisits the informational efficiency of the EU ETS at a micro level, by introducing a novel time variant structural decomposition of variance. The new modelling introduces GARCH-like effects into a structural price modelling. With this, all variance components, including public information and price discreteness, can be estimated, for the first time, in a continuously updated setup that is free of sampling bias. The empirical findings report that although all variance components decrease in magnitude, this is primarily due to higher overall market liquidity that results in less price discovery per trade. On a proportional basis, though, the EU ETS appears to be increasingly inefficient prior to the introduction of MiFID II rules, with the situation reversing after their implementation. This is evidence that transparency is vital in rendering emission allowances a policy rather than a speculative instrument.

Keywords: EU ETS; Market Efficiency; Transparency; Variance Decomposition (search for similar items in EconPapers)
JEL-codes: C30 C41 G14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10479-024-06032-2

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