Abstract
This work anlyses the relationship between the returns for carbon, electricity and fossil fuel price (coal, oil and natural gas), focusing on the impacts of emissions trading via a Vector Error Autoregressive Correction Model (VECM) for both German and French markets. Results show that the effect of carbon depends on the energy mix of the country under analysis but that it is not the only factor. Less carbon coercion takes place in the European Energy Exchange (EEX) and innovations in carbon are not strongly reflected in electricity prices. Also, market power affects the correct transfer of prices, thus limiting cost increases.
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Notes
- 1.
Signatories of the Kyoto Protocol in 1997 decided to reduce greenhouse gases (namely CO2) by limiting quantified emissions; Under the treaty, industrialized countries agreed to reduce their 1990 levels of greenhouse gas emissions by at least 5 % until 2012.
- 2.
Considered the trial phase when administrative and regulatory bodies were put on-line.
- 3.
During each of these Phases, allowances delivery is made on a yearly basis and follows a precise calendar: on February 28 of year N, European operators receive their allocation for the commitment year N; March 31 of year N is the deadline for the submission of the verified emissions report during year N − 1, from each installation to the European Commission; April 30 of year N is the deadline for the restitution of quotas utilized by operators during year N − 1; May 15 of year N corresponds to the deadline of the official publication by the European Commission of verified emissions for all installations covered by the EU ETS during year N − 1 (European Commission reports).
- 4.
This will be limited for Phase III (beginning in 2013), where allowances will not be issued completely free of charge (Friends of the Earth 2010). The allocation of allowances will be made primarily by auction, but until 2020, some allowances will continue to be allocated free of charge to the industrial sector in particular to reduce the costs to facilities in areas considered to be exposed to significant competition, especially from third countries. According to the DG Clima, this decision establishes the rules, including benchmarks for emissions of greenhouse gas emissions, but it is the responsibility of member states to calculate the number of allowances that will be provided free of charge to these areas each year.
- 5.
For more details on the relationship between coal, energy prices and fuel switching behaviour, institutional decisions and weather events between 2007 and 2009 see Chevallier (2012).
- 6.
These were May 28, 2007; December 30, 2008; and February 11, 2009.
- 7.
Results will be provided upon request.
- 8.
- 9.
Banking occurs when the right to emit carbon can be saved for future use, i.e. we can use a 2007 allowance in 2008. On the other hand, borrowing means that current emissions are extended against future abatement, i.e., we can borrow permits from future allocations for use in the current period (using 2008 allowances in 2007). Both banking and borrowing were forbidden between phase I and II.
- 10.
We were unable to include nuclear, wind or even hydro production due to lack of available data .
- 11.
See http://www.weatherindices.com/index. Moreover, due to data limitations and lack of availability for the countries considered here we do not consider other potential weather events such as wind.
- 12.
The dummy that captures the influence of cold temperatures equals one when the temperatures index in a given month is −1.97 °C below decennial seasonal averages and that of the influence of hot temperatures equals one when the temperatures index in a given month is 1.47 °C above decennial seasonal averages.
- 13.
Results are not provided here but are available on request.
- 14.
We test for the number of cointegrating vectors using the trace test introduced in Johansen (1992) and the Max-eigenvalue test.
- 15.
Schwartz criteria was also used and given the difference of the selected lag structure and the need to keep the VAR model parsimonious, we ran the \( \chi^{2} \) lag exclusion test.
- 16.
Endogenous lagged variables were transformed into their natural logarithms to reduce variability, and thus we obtain elasticity values directly from parameter estimates.
- 17.
World Bank Carbon Finance Unit (2010): State and Trends of the Carbon Market 2010.
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Madaleno, M., Pinho, C., Ribeiro, C. (2014). Commodity Price Interaction: CO2 Allowances, Fuel Sources and Electricity. In: Ramos, S., Veiga, H. (eds) The Interrelationship Between Financial and Energy Markets. Lecture Notes in Energy, vol 54. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55382-0_8
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