How Integrated is the European Carbon Derivatives Market?

Abstract

We assess the integration dynamics on the European carbon futures market at both the intraday and daily levels. We focus on EUA futures contracts that can be traded on three trading platforms: the Intercontinental-European Climate Exchange (ICE-ECX), the NASDAQ OMX (formerly Nord Pool) and the European Energy Exchange (EEX). We analyze trading activity for three different contract maturities and find that the ECX and EEX platforms exhibit a reasonable level of integration. The price discovery process does not occur at the daily level but rather at the hourly frequency. We conclude that this market still needs to be closely monitored by the regulatory authorities given the high level of volatility, the fragile level of liquidity, the weaker interconnectedness of the OMX platform, and the lower level of integration at longer maturities.

Keywords: Carbon, derivatives, EU ETS, cointegration, volatility, futures

JEL Classification: G13, G14, E44