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

• 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
• ISSN: 1567-9764; 1573-1553
• DOI: 10.1007/s10784-018-9411-3

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.