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The marginal impacts of energy prices on carbon price variations: Evidence from a quantile-on-quantile approach

The marginal impacts of energy prices on carbon price variations: Evidence from a quantile-on-quantile approach
The marginal impacts of energy prices on carbon price variations: Evidence from a quantile-on-quantile approach
We uncover the marginal impacts of energy prices on carbon price variations across carbon-energy price distributions in Phase III of the European Union Emission Trading Scheme (EU ETS). Applying a novel Quantile-on-Quantile (QQ) regression and the causality-in-quantiles approach, our empirical results demonstrate asymmetric and negative impacts of energy prices on carbon prices. The impacts are stronger at lower carbon quantiles and relatively smaller at higher quantiles (in absolute terms). Concerning different energy sources, the impacts of both oil and coal prices show a quasi-monotonic increase along with a rise in carbon quantiles; the absolute values of their impacts are much greater than that of the gas price impacts, depicting a relatively flat pattern. The results are consistent with our theoretical explanations which identify the two effect-transmission channels from energy to carbon prices, viz. the aggregated carbon demand effect and the fuel-switching effect. Thanks to the differences in energy sources and variability over their price distributions, the observed differential in carbon price-response is an indication of non-unique carbon market dynamics, the efficient management of which would require differentiated policy interventions. Robustness checks further confirm the accuracy of our conclusions.
Carbon futures prices, Causality-in-quantiles, EU ETS, Energy futures prices, Quantile-on-quantile
0140-9883
1-18
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Duan, Kun
9f37c2f9-7f41-4c71-9790-16795820e7d6
Ren, Xiaohang
970abdf4-ff20-4244-9952-f9ee910736ee
Shi, Yukun
0d34b0c0-a807-41ad-8060-3595fd5e0783
Yang, Cheng
b7514c4d-8e94-49d8-b7cc-4144b438acf4
Mishra, Tapas
218ef618-6b3e-471b-a686-15460da145e0
Duan, Kun
9f37c2f9-7f41-4c71-9790-16795820e7d6
Ren, Xiaohang
970abdf4-ff20-4244-9952-f9ee910736ee
Shi, Yukun
0d34b0c0-a807-41ad-8060-3595fd5e0783
Yang, Cheng
b7514c4d-8e94-49d8-b7cc-4144b438acf4

Mishra, Tapas, Duan, Kun, Ren, Xiaohang, Shi, Yukun and Yang, Cheng (2021) The marginal impacts of energy prices on carbon price variations: Evidence from a quantile-on-quantile approach. Energy Economics, 95, 1-18, [105131]. (doi:10.1016/j.eneco.2021.105131).

Record type: Article

Abstract

We uncover the marginal impacts of energy prices on carbon price variations across carbon-energy price distributions in Phase III of the European Union Emission Trading Scheme (EU ETS). Applying a novel Quantile-on-Quantile (QQ) regression and the causality-in-quantiles approach, our empirical results demonstrate asymmetric and negative impacts of energy prices on carbon prices. The impacts are stronger at lower carbon quantiles and relatively smaller at higher quantiles (in absolute terms). Concerning different energy sources, the impacts of both oil and coal prices show a quasi-monotonic increase along with a rise in carbon quantiles; the absolute values of their impacts are much greater than that of the gas price impacts, depicting a relatively flat pattern. The results are consistent with our theoretical explanations which identify the two effect-transmission channels from energy to carbon prices, viz. the aggregated carbon demand effect and the fuel-switching effect. Thanks to the differences in energy sources and variability over their price distributions, the observed differential in carbon price-response is an indication of non-unique carbon market dynamics, the efficient management of which would require differentiated policy interventions. Robustness checks further confirm the accuracy of our conclusions.

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Carbon_and_Energy_Price_Dependence_QQ_July2020_Third_Revision_ - Accepted Manuscript
Restricted to Repository staff only until 27 July 2022.
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Carbon_and_Energy_Price_Dependence___QQ___July2020__Third_Revision_
Restricted to Repository staff only
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More information

Accepted/In Press date: 17 January 2021
e-pub ahead of print date: 27 January 2021
Published date: 1 March 2021
Keywords: Carbon futures prices, Causality-in-quantiles, EU ETS, Energy futures prices, Quantile-on-quantile

Identifiers

Local EPrints ID: 446691
URI: http://eprints.soton.ac.uk/id/eprint/446691
ISSN: 0140-9883
PURE UUID: 199c3946-d074-430e-b741-bacf391a6ae1
ORCID for Tapas Mishra: ORCID iD orcid.org/0000-0002-6902-2326

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Date deposited: 18 Feb 2021 17:30
Last modified: 02 Jul 2022 01:49

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Contributors

Author: Tapas Mishra ORCID iD
Author: Kun Duan
Author: Xiaohang Ren
Author: Yukun Shi
Author: Cheng Yang

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