FEEM working papers "Note di lavoro" series
2015 .003

Flexibility in the Market for International Carbon Credits and Price Dynamics Difference with European Allowances


Authors: Claire Gavard, Djamel Kirat
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: European Allowances International Credits, Emissions Trading, Power Sector, Time Series Analysis
JEL n.: C32, C58, Q48, Q54, Q58

Abstract

We analyze the price dynamics of European allowances and international carbon credits in the second phase of the European carbon market. We develop and use a model combining fundamental drivers associated with the demand for quotas by installations and risk-return considerations related to the financial nature of carbon permits. We estimate it with autoregressive conditional heteroskedasticity models. Although carbon permits present some characteristics of financial assets, we find that an increased volatility is not associated with an increased return. The price of allowances and credits are explained by similar factors. However, whereas the corresponding returns present comparable dynamics, the long-term relationships between the price of these two types of permits and their drivers differ significantly. While the price of allowances is demand-driven, we suggest the existence of a supply-side effect for credits, and explain it by the flexibility in the related market. The impact of the European economic activity is less visible on credits than on allowances. The price elasticity of allowances with regards to the coal and gas prices is negative in time periods of low economic activity while it is positive in the rest of the time. We suggest an explanation for this dynamics difference.

***
Suggested citation: Gavard, C., D. Kirat, (2015), 'Flexibility in the Market for International Carbon Credits and Price. Dynamics Difference with European Allowances', Nota di Lavoro 3.2015, Milan, Italy: Fondazione Eni Enrico Mattei.
 

Download file
Download PDF file

FEEM Update

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree