We estimate an Error-Correction Model by using dynamic OLS to investigate carbon price drivers in early Phase II. The futures contract negotiated from January to December 2008 on the European Climate Exchange is the focus of our analysis. We consider the allowance price as explained by oil prices, the switching price and the Dow Jones Euro Stoxx 50. The long-term cointegration analysis shows that oil was the main driver of carbon prices in 2008. Technological variables, although statistically significant, had almost no impact on the endogenous variable. The financial index has not been a statistically significant regressor. We find an adjustment speed of 8% in the cointegrating equation. The short-term estimates show a two-tier relationship. Before the financial and economic turmoil, energy inputs were the drivers of carbon prices more than financial assets. After the oil crisis, carbon markets have become sensitive to equity pricing. Brent prices have halved their impact on permit prices. This kind of "equity paradox" in CO₂ price drivers represents a new finding in carbon market pricing.
The European Carbon Market in the Financial Turmoil: some empirics from early Phase II
BONACINA, MONICA;CRETI', ANNA;COZIALPI, SIMONE
2009
Abstract
We estimate an Error-Correction Model by using dynamic OLS to investigate carbon price drivers in early Phase II. The futures contract negotiated from January to December 2008 on the European Climate Exchange is the focus of our analysis. We consider the allowance price as explained by oil prices, the switching price and the Dow Jones Euro Stoxx 50. The long-term cointegration analysis shows that oil was the main driver of carbon prices in 2008. Technological variables, although statistically significant, had almost no impact on the endogenous variable. The financial index has not been a statistically significant regressor. We find an adjustment speed of 8% in the cointegrating equation. The short-term estimates show a two-tier relationship. Before the financial and economic turmoil, energy inputs were the drivers of carbon prices more than financial assets. After the oil crisis, carbon markets have become sensitive to equity pricing. Brent prices have halved their impact on permit prices. This kind of "equity paradox" in CO₂ price drivers represents a new finding in carbon market pricing.
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