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Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?

15 Pages Posted: 31 Oct 2009 Last revised: 17 Dec 2009

Don Bredin

University College Dublin

Cal B. Muckley

University College Dublin

Date Written: December 10, 2009

Abstract

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.

Keywords: CO2 prices, EU ETS, Energy, Kyoto Protocol, Unit root

JEL Classification: Q49, G12, G15

Suggested Citation

Bredin, Don and Muckley, Cal B., Is There a Stochastic Trend in European Union Emission Trading Scheme Prices? (December 10, 2009). Available at SSRN: https://ssrn.com/abstract=1497065 or http://dx.doi.org/10.2139/ssrn.1497065

Don Bredin

University College Dublin ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Cal B. Muckley (Contact Author)

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

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