IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v134y2024ics0140988324003347.html
   My bibliography  Save this article

Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method

Author

Listed:
  • Huang, Wenyang
  • Wang, Yizhi

Abstract

Amid growing climate concerns, Emissions Trading Schemes (ETS) serve as key mechanisms for reducing greenhouse gas emissions through market forces. This study delves into the phenomenon of price bubbles within six major ETSs globally: the European Union Emissions Trading Scheme (EU ETS), the New Zealand Emissions Trading Scheme (NZ ETS), the California-Québec Emissions Trading Scheme (CQ ETS), the South Korea Emissions Trading Schemes (K-ETS), the China Emissions Trading Scheme (C-ETS), and the United Kingdom Emissions Trading Schemes (UK ETS). Employing the sup augmented Dickey-Fuller (SADF) test, generalized sup ADF (GSADF) test, and log-periodic power law singularity (LPPLS) model, our analysis aims to uncover the dynamics and implications of these bubbles. Our findings reveal varied patterns of price bubbles across the schemes, with the EU ETS showing the highest frequency and the NZ ETS exhibiting the longest durations. The period of 2021 and 2022 marked a significant increase in bubble occurrences across all ETSs, suggesting the influence of post-COVID-19 economic recovery and geopolitical tensions on market stability. These bubbles are attributed to factors including carbon market policies, macroeconomic conditions, energy price fluctuations, and market uncertainties. The study offers valuable insights for compliance firms, policymakers, and investors on navigating carbon market volatility. Understanding bubble dynamics can aid in formulating more effective emission reduction strategies, carbon pricing policies, and investment decisions. This research underscores the importance of integrating monetary policy considerations with environmental objectives within ETS frameworks, paving the way for future research on predictive bubble detection and the development of robust carbon market regulations.

Suggested Citation

  • Huang, Wenyang & Wang, Yizhi, 2024. "Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method," Energy Economics, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:eneeco:v:134:y:2024:i:c:s0140988324003347
    DOI: 10.1016/j.eneco.2024.107626
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988324003347
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2024.107626?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(4), pages 1043-1078, November.
    2. Xu, Yingying & Salem, Sultan, 2021. "Explosive behaviors in Chinese carbon markets: are there price bubbles in eight pilots?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 145(C).
    3. Wu, Qingyang & Wang, Yanying, 2022. "How does carbon emission price stimulate enterprises' total factor productivity? Insights from China's emission trading scheme pilots," Energy Economics, Elsevier, vol. 109(C).
    4. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, February.
    5. Wu, Yangru, 1997. "Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 309-319, April.
    6. repec:dau:papers:123456789/4222 is not listed on IDEAS
    7. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, vol. 34(1), pages 327-334.
    8. Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sousa, Ricardo M., 2014. "What explain the short-term dynamics of the prices of CO2 emissions?," Energy Economics, Elsevier, vol. 46(C), pages 122-135.
    9. Peter C. B. Phillips & Jun Yu, 2011. "Dating the timeline of financial bubbles during the subprime crisis," Quantitative Economics, Econometric Society, vol. 2(3), pages 455-491, November.
    10. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    11. David Houle & Erick Lachapelle & Mark Purdon, 2015. "Comparative Politics of Sub-Federal Cap-and-Trade: Implementing the Western Climate Initiative," Global Environmental Politics, MIT Press, vol. 15(3), pages 49-73, August.
    12. Hyungna Oh & Junwon Hyon & Jin-Oh Kim, 2017. "Korea’s approach to overcoming difficulties in adopting the emission trading scheme," Climate Policy, Taylor & Francis Journals, vol. 17(8), pages 947-961, November.
    13. Grischa Perino, 2018. "New EU ETS Phase 4 rules temporarily puncture waterbed," Nature Climate Change, Nature, vol. 8(4), pages 262-264, April.
    14. Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, , vol. 28(3), pages 73-92, July.
    15. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-530, June.
    16. Anders Johansen & Didier Sornette, 2010. "Shocks, Crashes and Bubbles in Financial Markets," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 53(2), pages 201-253.
    17. Matthew Ranson & Robert N. Stavins, 2016. "Linkage of greenhouse gas emissions trading systems: learning from experience," Climate Policy, Taylor & Francis Journals, vol. 16(3), pages 284-300, April.
    18. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    19. Qun Zhang & Qunzhi Zhang & Didier Sornette, 2016. "Early Warning Signals of Financial Crises with Multi-Scale Quantile Regressions of Log-Periodic Power Law Singularities," PLOS ONE, Public Library of Science, vol. 11(11), pages 1-43, November.
    20. Wanfeng Yan & Ryan Woodard & Didier Sornette, 2010. "Diagnosis and Prediction of Tipping Points in Financial Markets: Crashes and Rebounds," Papers 1001.0265, arXiv.org, revised Feb 2010.
    21. Koch, Nicolas & Fuss, Sabine & Grosjean, Godefroy & Edenhofer, Ottmar, 2014. "Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything?—New evidence," Energy Policy, Elsevier, vol. 73(C), pages 676-685.
    22. Tan, Xue-Ping & Wang, Xin-Yu, 2017. "Dependence changes between the carbon price and its fundamentals: A quantile regression approach," Applied Energy, Elsevier, vol. 190(C), pages 306-325.
    23. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    24. Zaklan, Aleksandar & Wachsmuth, Jakob & Duscha, Vicki, 2021. "The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 21(6), pages 778-791.
    25. Filimonov, V. & Sornette, D., 2013. "A stable and robust calibration scheme of the log-periodic power law model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3698-3707.
    26. Goncalves, Silvia & Kilian, Lutz, 2004. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, vol. 123(1), pages 89-120, November.
    27. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1043-1078, November.
    28. Johansen, Anders, 2003. "Characterization of large price variations in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 157-166.
    29. Wei, Yigang & Li, Yan & Wang, Zhicheng, 2022. "Multiple price bubbles in global major emission trading schemes: Evidence from European Union, New Zealand, South Korea and China," Energy Economics, Elsevier, vol. 113(C).
    30. Jörg Mayer, 2012. "The Growing Financialisation of Commodity Markets: Divergences between Index Investors and Money Managers," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 751-767, June.
    31. Huang, Wenyang & Wang, Huiwen & Qin, Haotong & Wei, Yigang & Chevallier, Julien, 2022. "Convolutional neural network forecasting of European Union allowances futures using a novel unconstrained transformation method," Energy Economics, Elsevier, vol. 110(C).
    32. Catherine Leining & Suzi Kerr & Bronwyn Bruce-Brand, 2020. "The New Zealand Emissions Trading Scheme: critical review and future outlook for three design innovations," Climate Policy, Taylor & Francis Journals, vol. 20(2), pages 246-264, February.
    33. Viteva, Svetlana & Veld-Merkoulova, Yulia V. & Campbell, Kevin, 2014. "The forecasting accuracy of implied volatility from ECX carbon options," Energy Economics, Elsevier, vol. 45(C), pages 475-484.
    34. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-930, September.
    35. Yao, Can-Zhong & Li, Hong-Yu, 2021. "A study on the bursting point of Bitcoin based on the BSADF and LPPLS methods," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    36. Drew Riedl, 2022. "Why market actors fuel the carbon bubble. The agency, governance, and incentive problems that distort corporate climate risk management," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 12(2), pages 407-422, April.
    37. Huang, Wenyang & Zhao, Jianyu & Wang, Xiaokang, 2024. "Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price," Energy Economics, Elsevier, vol. 132(C).
    38. Böhringer, Christoph, 2003. "The Kyoto Protocol: A Review and Perspectives," ZEW Discussion Papers 03-61, ZEW - Leibniz Centre for European Economic Research.
    39. Behzad T. Diba & Herschel I. Grossman, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 697-700.
    40. Tan, Xiujie & Liu, Yishuang & Dong, Hanmin & Zhang, Zhan, 2022. "The effect of carbon emission trading scheme on energy efficiency: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 506-517.
    41. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 553-580.
    42. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    43. Vladimir Filimonov & Didier Sornette, 2011. "A Stable and Robust Calibration Scheme of the Log-Periodic Power Law Model," Papers 1108.0099, arXiv.org, revised Jun 2013.
    44. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    45. Phillips, Peter C.B. & Magdalinos, Tassos, 2007. "Limit theory for moderate deviations from a unit root," Journal of Econometrics, Elsevier, vol. 136(1), pages 115-130, January.
    46. Li, Chong, 2017. "Log-periodic view on critical dates of the Chinese stock market bubbles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 305-311.
    47. Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
    48. Huang, Wenyang & Gao, Tianxiao & Hao, Yun & Wang, Xiuqing, 2023. "Transformer-based forecasting for intraday trading in the Shanghai crude oil market: Analyzing open-high-low-close prices," Energy Economics, Elsevier, vol. 127(PA).
    49. Yigang Wei & Xin Liang & Liang Xu & Gang Kou & Julien Chevallier, 2023. "Trading, storage, or penalty? Uncovering firms' decision-making behavior in the Shanghai emissions trading scheme: Insights from agent-based modeling," Post-Print halshs-04250312, HAL.
    50. Johansen, Anders & Sornette, Didier, 2001. "Finite-time singularity in the dynamics of the world population, economic and financial indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 465-502.
    51. Maria Mansanet-Bataller & Julien Chevallier & Morgan Hervé-Mignucci & Emilie Alberola, 2010. "The EUA-sCER Spread: Compliance Strategies and Arbitrage in the European Carbon Market," Post-Print halshs-00458991, HAL.
    52. Wang, Xiao-Qing & Su, Chi-Wei & Lobonţ, Oana-Ramona & Li, Hao & Nicoleta-Claudia, Moldovan, 2022. "Is China's carbon trading market efficient? Evidence from emissions trading scheme pilots," Energy, Elsevier, vol. 245(C).
    53. Grobys, Klaus, 2023. "A finite-time singularity in the dynamics of the US equity market: Will the US equity market eventually collapse?," International Review of Financial Analysis, Elsevier, vol. 89(C).
    54. Junko Mochizuki, 2011. "Assessing the designs and effectiveness of Japan's emissions trading scheme," Climate Policy, Taylor & Francis Journals, vol. 11(6), pages 1337-1349, November.
    55. Peter Howie & Shreekant Gupta & Hojeong Park & Daulet Akmetov, 2020. "Evaluating policy success of emissions trading schemes in emerging economies: comparing the experiences of Korea and Kazakhstan," Climate Policy, Taylor & Francis Journals, vol. 20(5), pages 577-592, May.
    56. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    57. Wei, Yigang & Liang, Xin & Xu, Liang & Kou, Gang & Chevallier, Julien, 2023. "Trading, storage, or penalty? Uncovering firms' decision-making behavior in the Shanghai emissions trading scheme: Insights from agent-based modeling," Energy Economics, Elsevier, vol. 117(C).
    58. Yan, Jingchi, 2021. "The impact of climate policy on fossil fuel consumption: Evidence from the Regional Greenhouse Gas Initiative (RGGI)," Energy Economics, Elsevier, vol. 100(C).
    59. Wenyang Huang & Huiwen Wang & Haotong Qin & Yigang Wei & Julien Chevallier, 2022. "Convolutional neural network forecasting of European Union allowances futures using a novel unconstrained transformation method," Post-Print halshs-04250297, HAL.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huang, Wenyang & Zhao, Jianyu & Wang, Xiaokang, 2024. "Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price," Energy Economics, Elsevier, vol. 132(C).
    2. Akcora, Begum & Kandemir Kocaaslan, Ozge, 2023. "Price bubbles in the European natural gas market between 2011 and 2020," Resources Policy, Elsevier, vol. 80(C).
    3. Michaelides, Panayotis G. & Tsionas, Efthymios G. & Konstantakis, Konstantinos N., 2016. "Non-linearities in financial bubbles: Theory and Bayesian evidence from S&P500," Journal of Financial Stability, Elsevier, vol. 24(C), pages 61-70.
    4. Huang, Wenyang & Wang, Huiwen & Qin, Haotong & Wei, Yigang & Chevallier, Julien, 2022. "Convolutional neural network forecasting of European Union allowances futures using a novel unconstrained transformation method," Energy Economics, Elsevier, vol. 110(C).
    5. Efthymios Pavlidis & Alisa Yusupova & Ivan Paya & David Peel & Enrique Martínez-García & Adrienne Mack & Valerie Grossman, 2016. "Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun," The Journal of Real Estate Finance and Economics, Springer, vol. 53(4), pages 419-449, November.
    6. Su, Chi-Wei & Li, Zheng-Zheng & Chang, Hsu-Ling & Lobonţ, Oana-Ramona, 2017. "When Will Occur the Crude Oil Bubbles?," Energy Policy, Elsevier, vol. 102(C), pages 1-6.
    7. Yao, Can-Zhong & Li, Hong-Yu, 2021. "A study on the bursting point of Bitcoin based on the BSADF and LPPLS methods," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    8. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    9. Kristoffer Pons Bertelsen, 2019. "Comparing Tests for Identification of Bubbles," CREATES Research Papers 2019-16, Department of Economics and Business Economics, Aarhus University.
    10. Khalid Khan & Chi-Wei Su & Adnan Khurshid & Muhammad Umar, 2022. "Are there bubbles in the vanilla price?," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 10(1), pages 1-16, December.
    11. Wang, Xiao-Qing & Qin, Meng & Moldovan, Nicoleta-Claudia & Su, Chi-Wei, 2023. "Bubble behaviors in lithium price and the contagion effect: An industry chain perspective," Resources Policy, Elsevier, vol. 83(C).
    12. Su, Chi-Wei & Wang, Xiao-Qing & Zhu, Haotian & Tao, Ran & Moldovan, Nicoleta-Claudia & Lobonţ, Oana-Ramona, 2020. "Testing for multiple bubbles in the copper price: Periodically collapsing behavior," Resources Policy, Elsevier, vol. 65(C).
    13. Assaf, Ata & Demir, Ender & Ersan, Oguz, 2024. "Detecting and date-stamping bubbles in fan tokens," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 98-113.
    14. Zhao, Yanping & Chang, Hsu-Ling & Su, Chi-Wei & Nian, Rui, 2015. "Gold bubbles: When are they most likely to occur?," Japan and the World Economy, Elsevier, vol. 34, pages 17-23.
    15. Podhorsky, Andrea, 2024. "Bursting the bitcoin bubble: Do market prices reflect fundamental bitcoin value?," International Review of Financial Analysis, Elsevier, vol. 93(C).
    16. Wei, Yigang & Li, Yan & Wang, Zhicheng, 2022. "Multiple price bubbles in global major emission trading schemes: Evidence from European Union, New Zealand, South Korea and China," Energy Economics, Elsevier, vol. 113(C).
    17. Martínez-García, Enrique & Grossman, Valerie, 2020. "Explosive dynamics in house prices? An exploration of financial market spillovers in housing markets around the world," Journal of International Money and Finance, Elsevier, vol. 101(C).
    18. Gharib, Cheima & Mefteh-Wali, Salma & Serret, Vanessa & Ben Jabeur, Sami, 2021. "Impact of COVID-19 pandemic on crude oil prices: Evidence from Econophysics approach," Resources Policy, Elsevier, vol. 74(C).
    19. Jerome L Kreuser & Didier Sornette, 2017. "Super-Exponential RE Bubble Model with Efficient Crashes," Swiss Finance Institute Research Paper Series 17-33, Swiss Finance Institute.
    20. Chang, Chiu-Lan, 2024. "Extreme events, economic uncertainty and speculation on occurrences of price bubbles in crude oil futures," Energy Economics, Elsevier, vol. 130(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:134:y:2024:i:c:s0140988324003347. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.