An analysis of the EU Emission Trading Scheme

Donal Bredin and Cal Muckley

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: The European Union's Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. A critically important element of the EU ETS is the establishment of a market determined price for EU allowances. This article examines the extent to which several theoretically founded factors including, economic growth, energy prices and weather conditions determine the expected prices of the European Union CO2 allowances during the 2005 through to the 2009 period. The novel aspect of our study is that we examine the heavily traded futures instruments that have an expiry date in Phase 2 of the EU ETS. Our study adopts both static and recursive versions of the Johansen multivariate cointegration likelihood ratio test as well as a variation on this test with a view to controlling for time varying volatility effects. Our results are indicative of a new pricing regime emerging in Phase 2 of the market and point to a maturing market driven by the fundamentals. These results are valuable both for traders of EU allowances and for those policy makers seeking to improve the design of the European Union ETS.

Keywords: CO2 prices; Energy; EU ETS; Kyoto protocol; Weather; Emissions trading--Europe; Carbon dioxide mitigation; Energy policy--Europe (search for similar items in EconPapers)
JEL-codes: G12 G15 Q49 (search for similar items in EconPapers)
Date: 2009
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http://hdl.handle.net/10197/2568 First version, 2009 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/2568

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