Flexibility in the market for international carbon credits and price dynamics difference with European allowances


Gavard, Claire ; Kirat, Djamel


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URL: https://ub-madoc.bib.uni-mannheim.de/43707
URN: urn:nbn:de:bsz:180-madoc-437077
Document Type: Working paper
Year of publication: 2017
The title of a journal, publication series: ZEW Discussion Papers
Volume: 17-054
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Keywords (English): European allowances , international credits , emissions trading , power sector , structural breaks , time series analysis
Abstract: The Paris Agreement establishes a mechanism to allow a Party to benefit from greenhouse gases emissions reductions conducted in a host Party to fulfil its nationally determined contribution. In this context, the objective of this paper is to improve the understanding of carbon offsets price dynamics, in comparison with regular carbon markets allowances. We combine a cointegration approach with risk premium considerations to compare the price dynamics of European Union Allowances (EUA) and Certified Emission Reductions (CER) in the second phase of the European carbon market. By taking account of breaks identified in the series, we find that, while the EUA and CER returns present comparable dynamics, the long-term relationships between the price of these two types of permits and their drivers differ significantly. Given the impact of energy prices (positive for coal and negative for gas) on the CER price, we suggest the existence of a supply-side effect for credits. We find that the price elasticity of allowances with regard to the coal and gas prices is negative in time periods of low economic activity and positive in the rest of the time. We explain the latter by the fact that the market is not tight and the former by the effect of the economic activity on the price of commodities and energy.

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Gavard, Claire ; Kirat, Djamel (2017) Flexibility in the market for international carbon credits and price dynamics difference with European allowances. Open Access ZEW Discussion Papers Mannheim 17-054 [Working paper]
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