How Interdependent are Energy and Carbon Markets? Evidence from a Quantile-on-Quantile Regression Approach

35 Pages Posted: 22 Aug 2019

See all articles by Kun Duan

Kun Duan

University of Southampton - Southampton Business School

Xiaohang Ren

University of Southampton

Yukun Shi

University of Glasgow; University of Leicester

Tapas Mishra

Southampton Business School, University of Southampton

Cheng Yan

Durham Business School

Date Written: August 20, 2019

Abstract

We premise and model the dynamic interdependence between energy and carbon prices in Phase III of the European Union Emission Trading Scheme (EU ETS) in a heterogeneous impulse-response setting. Our research framework is based on the proposition that energy prices (e.g., oil, natural gas, and coal) would impact carbon prices negatively, but the impact magnitudes would be varied over the distribution of carbon and energy prices, having thus important policy implications. Applying a novel Quantile-on-Quantile (QQ) regression and the causality-in-quantiles approach, we show that the negative impacts are much stronger when carbon prices are at lower quantiles of the price distribution compared with that at the higher quantiles. In the face of different nature in energy price shocks, the asymmetric carbon price-response is an indication of the non-unique carbon market dynamics, the efficient management of which would require differentiated policy interventions. Robustness checks reassure the accuracy of our conclusions.

Keywords: Carbon futures price; Energy futures prices; EU ETS; Quantile-on-Quantile; Causality-in-quantiles

JEL Classification: C31; C33; Q41; R41

Suggested Citation

Duan, Kun and Ren, Xiaohang and Shi, Yukun and Mishra, Tapas and Yan, Cheng, How Interdependent are Energy and Carbon Markets? Evidence from a Quantile-on-Quantile Regression Approach (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3440173 or http://dx.doi.org/10.2139/ssrn.3440173

Kun Duan

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Xiaohang Ren (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Yukun Shi

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Tapas Mishra

Southampton Business School, University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Cheng Yan

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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