What drives the European carbon market? Macroeconomic factors and forecasts

Andrea Bastianin, Elisabetta Mirto, Yan Qin and Luca Rossini
Additional contact information
Elisabetta Mirto: University of Milan
Yan Qin: London Stock Exchange Group

No 2024.02, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Putting a price on carbon – with taxes or developing carbon markets – is a widely used policy measure to achieve the target of net-zero emissions by 2050. This paper tackles the issue of producing point, direction-of-change, and density forecasts for the monthly real price of carbon within the EU Emissions Trading Scheme (EU ETS). We aim to uncover supply- and demand-side forces that can contribute to improving the prediction accuracy of models at short- and medium-term horizons. We show that a simple Bayesian Vector Autoregressive (BVAR) model, augmented with either one or two factors capturing a set of predictors affecting the price of carbon, provides substantial accuracy gains over a wide set of benchmark forecasts, including survey expectations and forecasts made available by data providers. We extend the study to verified emissions and demonstrate that, in this case, adding stochastic volatility can further improve the forecasting performance of a single-factor BVAR model. We rely on emissions and price forecasts to build market monitoring tools that track demand and price pressure in the EU ETS market. Our results are relevant for policymakers and market practitioners interested in quantifying the desired and unintended macroeconomic effects of monitoring the carbon market dynamics.

Keywords: Bayesian inference; Carbon prices; Climate Changes; EU ETS; Forecasting (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 Q02 Q50 (search for similar items in EconPapers)
Date: 2024-02
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env, nep-eur and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://feem-media.s3.eu-central-1.amazonaws.com/w ... loads/NDL2024-02.pdf (application/pdf)

Related works:
Working Paper: What drives the European carbon market? Macroeconomic factors and forecasts (2024)
Working Paper: What drives the European carbon market? Macroeconomic factors and forecasts (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2024.02

Access Statistics for this paper

More papers in Working Papers from Fondazione Eni Enrico Mattei Contact information at EDIRC.
Bibliographic data for series maintained by Alberto Prina Cerai ( this e-mail address is bad, please contact ).