What Determines the Price of Carbon? New Evidence From Phase III and IV of the EU ETS

39 Pages Posted: 18 Dec 2024

See all articles by Bente Dittmann

Bente Dittmann

Leibniz University Hannover

Tobias Lauter

Leibniz University Hannover; Macquarie University - Department of Actuarial Studies and Business Analytics

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Philipp Sibbertsen

University of Hannover

Date Written: November 14, 2024

Abstract

In this paper, we provide new evidence on the determinants of EU emission allowance prices by analyzing the most recent time period, i.e. phases III and IV. We consider energy (oil, natural gas, coal) and electricity prices as well as profit spreads of marginal power generation (clean dark spread, clean spark spread) using various modeling approaches. We find that none of the approaches that have been proposed in the early literature on carbon pricing is suitable to explain the allowance price in more recent samples. Among the variables, crude oil appears to be the most important market fundamental, as it explains the largest share of variance on its own. However, the explanatory power of all variables diminishes compared to what has been documented before. Previous literature shows that the market fundamentals are able to explain about 30% of the variation of EU emission allowances in phase I, while we show that the explanatory power drops to below 5% in the more recent trading phases III and IV. We conjecture that as more and more industries fall under the regulation, the economic mechanics have fundamentally changed.

Keywords: EUA price fundamentals, Carbon price, EU ETS

JEL Classification: C22, C32, G13, Q49

Suggested Citation

Dittmann, Bente and Lauter, Tobias and Prokopczuk, Marcel and Sibbertsen, Philipp, What Determines the Price of Carbon? New Evidence From Phase III and IV of the EU ETS (November 14, 2024). Available at SSRN: https://ssrn.com/abstract=5053285 or http://dx.doi.org/10.2139/ssrn.5053285

Bente Dittmann (Contact Author)

Leibniz University Hannover ( email )

Königsworther Platz 1
Hannover, DE Lower Saxony 30167
Germany

Tobias Lauter

Leibniz University Hannover ( email )

Königsworther Platz 1
Hannover, 30167
Germany

Macquarie University - Department of Actuarial Studies and Business Analytics ( email )

Australia

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Philipp Sibbertsen

University of Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

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