IDEAS home Printed from https://ideas.repec.org/a/wsi/cjuesx/v12y2024i03ns2345748124500180.html
   My bibliography  Save this article

Does Speculation Matter in the Carbon Pricing Framework? Insights from the EU Emissions Trading System

Author

Listed:
  • Kazeem O. ISAH

    (Department of Economics, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

  • Joy E. A. EBEH

    (Department of Economics, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

  • Damilola ABOLUWODI

    (The School of Accounting, Economics & Finance, College of Law and Management Studies, Westville, Private Bag X 54001, Durban, South Africa)

  • Monday ALIU

    (Department of Political Sciences, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

  • Salam S. MOHAMMED

    (Department of Economics, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

  • Yusuf YAKUBU

    (Department of Economics, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

  • Muhammad ALI

    (Department of Economics, Prince Abubakar Audu University (PAAU), P.M.B 1008, Ayingba, Kogi State, Nigeria)

Abstract

To align with the global goal of keeping temperature below 2∘C, a market-based initiative, “Emissions Trading System†(ETS), has been developed to mitigate climate change. However, while the carbon allowances traded at the ETS are mostly held and traded by polluting companies, financial actors engage in “speculation†, activities that might be detrimental to the functioning of the ETS have also invested in the ETS. By drawing from the big data archive of Google Trends, we construct a news-based speculation index to proxy for the role of speculation in the dynamics of carbon pricing. Given our preliminary finding of inherent volatility and the mixed-frequency nature of the dataset, we employ the GARCH-MIDAS econometric technique to test the hypothesis that an all-inclusive framework that reflects the emission compliance and emissions non-compliance dynamics of the ETS is the most accurate approach to modeling carbon prices. We show that higher speculation in the ETS fosters higher long-term volatility in carbon prices, that speculation is a good predictor of carbon prices, and that its positive impact on carbon price returns makes the ETS an attractive investment opportunity. We provide a data-driven framework upon which the growing debate about whether the behavior of the non-compliance emission actors in the ETS endangers or benefits the functioning of the ETS can be evaluated empirically.

Suggested Citation

  • Kazeem O. ISAH & Joy E. A. EBEH & Damilola ABOLUWODI & Monday ALIU & Salam S. MOHAMMED & Yusuf YAKUBU & Muhammad ALI, 2024. "Does Speculation Matter in the Carbon Pricing Framework? Insights from the EU Emissions Trading System," Chinese Journal of Urban and Environmental Studies (CJUES), World Scientific Publishing Co. Pte. Ltd., vol. 12(03), pages 1-26, September.
  • Handle: RePEc:wsi:cjuesx:v:12:y:2024:i:03:n:s2345748124500180
    DOI: 10.1142/S2345748124500180
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2345748124500180
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1142/S2345748124500180?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.

    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:wsi:cjuesx:v:12:y:2024:i:03:n:s2345748124500180. 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.

    We have no bibliographic references for this item. You can help adding them by using 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/cjues/cjues.shtml .

    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.