The erratic behaviour of the EU ETS on the path towards consolidation and price stability

The Kyoto Protocol envisages the use of various instruments to achieve emission reduction targets, one of which is the European Union Emission Trading Scheme (EU ETS), the most important market worldwide for CO 2 emission allowances. The volume of European Union Allowances traded represents over 45%...

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Bibliographic Details
Published in:International environmental agreements : politics, law and economics law and economics, 2018-10, Vol.18 (5), p.689-706
Main Authors: Galán-Valdivieso, Federico, Villar-Rubio, Elena, Huete-Morales, María-Dolores
Format: Article
Language:English
Subjects:
Allowances
Arches
Autoregressive models
Carbon dioxide
Carbon dioxide emissions
Earth and Environmental Science
Economic activity
Economic conditions
Emissions control
Emissions trading
Empirical analysis
Environment
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Environmental protection
Kyoto Protocol
Markets
Nature Conservation
Original Paper
Political Science
Prices
Pricing
Regulation
Stability
Stochastic models
Trust
Volatility
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Summary:The Kyoto Protocol envisages the use of various instruments to achieve emission reduction targets, one of which is the European Union Emission Trading Scheme (EU ETS), the most important market worldwide for CO 2 emission allowances. The volume of European Union Allowances traded represents over 45% of all the carbon dioxide generated by human activity within the continent. In its first two phases (2005–2012), the behaviour of the EU ETS was erratic, as a result of discretionary policies, an oversupply of allowances and reduced economic activity due to the global crisis. These factors caused excessively low prices that distorted the initial goals of achieving low-carbon solutions. From 2013, changes were made to the market regulation mechanisms in order to correct these structural deficiencies. Empirical analysis of daily prices in the two central phases of the market, following the pattern of ARCH and GARCH models, shows that the measures taken within the EU generated greater confidence and stability in the market and thus reduced volatility. Subsequent price behaviour, following a bullish path, has confirmed the success of the measures taken and their contribution to fulfilling emission reduction targets.
ISSN:1567-9764
1573-1553
DOI:10.1007/s10784-018-9411-3