Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?
University College Dublin
Cal B. Muckley
University College Dublin (UCD) - UCD Smurfit Graduate School of Business
December 10, 2009
The European Union’s Emission Trading Scheme (ETS) is the key policy instrument of the European Commissions Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. The key asset traded under the scheme is the European Union Allowance (EUA). To further curtail greenhouse gas emissions the EU Allowance prices should follow a stationary path about a persistent upward trend. In this vein, this article finds evidence to the contrary indicating the presence of a stochastic trend (a unit root) in EU Allowance prices during the period from April 2005 through to July 2009. This finding is indicative of an incoherence between the European Union ETS de jure policy, with regard to transiting to a low carbon economy, and EUA price behaviour.
Number of Pages in PDF File: 15
Keywords: CO2 prices, EU ETS, Energy, Kyoto Protocol, Unit root
JEL Classification: Q49, G12, G15
Date posted: October 31, 2009 ; Last revised: December 17, 2009
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