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

Claire Gavard and Djamel Kirat

Energy Economics, 2018, vol. 76, issue C, 504-518

Abstract: The Paris Agreement establishes a mechanism which allows a Party to benefit from greenhouse gas 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 offset price dynamics in comparison with regular carbon market 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 mainly driven by fuel switching, the long-term relationships between the price of these two types of permits and their drivers differ significantly. Whereas the price of EUA is well explained by a demand effect, the impact of energy prices on the CER price suggests 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 during the remaining time. We explain the former with the fact that the market is not tight and the latter with the effect of the economic activity on the price of commodities and energy.

Keywords: European allowances; International credits; Emissions trading; Power sector; Structural breaks; Time series analysis (search for similar items in EconPapers)
JEL-codes: C32 C58 Q42 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988318304201
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Flexibility in the market for international carbon credits and price dynamics difference with European allowances (2017)
Working Paper: Flexibility in the Market for International Carbon Credits and Price. Dynamics Difference with European Allowances (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:76:y:2018:i:c:p:504-518

DOI: 10.1016/j.eneco.2018.10.018

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().