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California carbon allowance futures

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  • Shi, Shimeng
  • Zhai, Jia

Abstract

Carbon pricing is an important tool to address climate challenge, while limited attention has been given to the U.S. carbon derivatives market, i.e., California carbon allowance (CCA) futures market. To deal with various data frequencies, we use a mixed frequency vector autoregressive model. We find that changes in trading positions of hedgers and speculators can affect the CCA futures returns. Like other commodity futures markets, commercials act as contrarians, while non-commercials behave like momentum traders. We find some evidence of a feedback relationship between the CCA futures market and California's economic condition. The interaction between the energy sector and the carbon futures market is evident. The CCA futures market is more sensitive to climate policy risk than abnormal temperature. Other ETSs’ carbon futures prices and inflation expectation could affect the CCA futures returns on some trading days.

Suggested Citation

  • Shi, Shimeng & Zhai, Jia, 2024. "California carbon allowance futures," Finance Research Letters, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:finlet:v:70:y:2024:i:c:s1544612324012947
    DOI: 10.1016/j.frl.2024.106265
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    References listed on IDEAS

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    Cited by:

    1. Pierre Bernhard & Romain Biard & Marc Deschamps, 2025. "Dynamic equilibrium with randomly entering and exiting firms of different types," Working Papers 2025-01, CRESE.

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    More about this item

    Keywords

    California carbon allowance futures; CFTC's trading position; Energy sector; Real economy; Climate change;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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