The Timeline of Trading Frictions in the European Carbon Market

59 Pages Posted: 26 Oct 2011 Last revised: 7 Oct 2014

See all articles by Vicente Medina

Vicente Medina

University of Valencia

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics

Roberto Pascual

Universidad de las Islas Baleares

Date Written: December 17, 2013

Abstract

During its trial phase (Phase I), the EU Greenhouse Gas Emission Trading Scheme (EU-ETS) collapsed because of an over-allocation of emission allowances. We evaluate the progress of this market from the trial phase to the next commitment period (Phase II) from a microstructure angle. We show that trading frictions, as measured by the relative spread, information-asymmetry risk, and market making profits decreased from Phase I to Phase II. Although volatility decreased, its noise-related component gained prominence over its information-related component, resulting in lower quality of the price changes.

Keywords: European Union Emission Trading Scheme; European Union Allowances; trading frictions; informativeness of prices; market quality; market microstructure

JEL Classification: G1

Suggested Citation

Medina, Vicente and Pardo Tornero, Ángel and Pascual Gascó, Roberto, The Timeline of Trading Frictions in the European Carbon Market (December 17, 2013). Energy Economics, 42, 378-394 (2014), Available at SSRN: https://ssrn.com/abstract=1949259 or http://dx.doi.org/10.2139/ssrn.1949259

Vicente Medina (Contact Author)

University of Valencia ( email )

Avda. de los Naranjos s/n
Valencia, Valencia E-46022
Spain

Ángel Pardo Tornero

University of Valencia - Department of Financial Economics ( email )

Avda. del Tarongers, s/n
46022 Valencia
Spain

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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