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Modelling the dynamics of fuel and EU allowance prices during phase 3 of the EU ETS

Modelling the dynamics of fuel and EU allowance prices during phase 3 of the EU ETS
Modelling the dynamics of fuel and EU allowance prices during phase 3 of the EU ETS

This article studies the relationship between the prices of fuel and EU Allowances (EUA) for carbon emissions during Phase 3 of the European Union Emissions Trading System. We find that the forward prices of EUA, coal, gas and Brent oil are jointly determined in equilibrium. The existence of such a long-run relationship entails a permanent-transitory decomposition for the series of EUA and fuel prices that reveals the short- and long-term causal influence of the EUA market in shaping the joint dynamics of fuel prices. This result complements the literature that suggests that EUA prices are driven by the dynamics of fuel prices. Interestingly, we do not find an equilibrium relationship in the spot market. EUA and fuel spot prices are driven by independent unit root processes. The differences between spot and forward markets are attributed to the tradability of forward prices that are used for speculation and hedging in financial markets. In contrast, spot prices are mainly driven by supply and demand in energy markets.

Carbon price, Cointegration, Eu ets, Forecasting, Permanent-transitory decomposition
1996-1073
1-23
Carnero, M. Angeles
71be0a05-66f3-481e-8e00-b07ba60baae0
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Pascual, Lorenzo
0224de5c-d6b7-4cfe-8fb2-4cc999d4ab2a
Carnero, M. Angeles
71be0a05-66f3-481e-8e00-b07ba60baae0
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Pascual, Lorenzo
0224de5c-d6b7-4cfe-8fb2-4cc999d4ab2a

Carnero, M. Angeles, Olmo, Jose and Pascual, Lorenzo (2018) Modelling the dynamics of fuel and EU allowance prices during phase 3 of the EU ETS. Energies, 11 (11), 1-23, [3148]. (doi:10.3390/en11113148).

Record type: Article

Abstract

This article studies the relationship between the prices of fuel and EU Allowances (EUA) for carbon emissions during Phase 3 of the European Union Emissions Trading System. We find that the forward prices of EUA, coal, gas and Brent oil are jointly determined in equilibrium. The existence of such a long-run relationship entails a permanent-transitory decomposition for the series of EUA and fuel prices that reveals the short- and long-term causal influence of the EUA market in shaping the joint dynamics of fuel prices. This result complements the literature that suggests that EUA prices are driven by the dynamics of fuel prices. Interestingly, we do not find an equilibrium relationship in the spot market. EUA and fuel spot prices are driven by independent unit root processes. The differences between spot and forward markets are attributed to the tradability of forward prices that are used for speculation and hedging in financial markets. In contrast, spot prices are mainly driven by supply and demand in energy markets.

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Accepted/In Press date: 9 November 2018
e-pub ahead of print date: 14 November 2018
Published date: 14 November 2018
Keywords: Carbon price, Cointegration, Eu ets, Forecasting, Permanent-transitory decomposition

Identifiers

Local EPrints ID: 426763
URI: http://eprints.soton.ac.uk/id/eprint/426763
ISSN: 1996-1073
PURE UUID: de2bb5ea-0c5a-401b-a2f1-000daf1baaa2
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

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Date deposited: 12 Dec 2018 17:30
Last modified: 07 Oct 2020 02:03

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Contributors

Author: M. Angeles Carnero
Author: Jose Olmo ORCID iD
Author: Lorenzo Pascual

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