Price Drivers and Structural Breaks in European Carbon Prices 2005-2007

Abstract

This article aims at characterizing the daily price fundamentals of European Union Allowances (EUAs) traded since 2005 as part of the Emissions Trading Scheme (ETS). The presence of two structural changes on April 2006 following the disclosure of 2005 verified emissions and on October 2006 following the European Commission announcement of stricter Phase II allocation allows to isolate distinct fundamentals evolving overtime. The results extend previous literature by showing that EUA spot prices react not only to energy prices with forecast errors, but also to unanticipated temperatures changes during colder events. Besides, the sub-period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes.

Keywords: Carbon emissions trading, Market price fundamentals, EU ETS

JEL Classification: Q40, Q48, Q54