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The puzzle of Carbon Allowance spread

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  • Michele Azzone
  • Roberto Baviera
  • Pietro Manzoni

Abstract

A growing number of contributions in the literature have identified a puzzle in the European carbon allowance (EUA) market. Specifically, a persistent cost-of-carry spread (C-spread) over the risk-free rate has been observed. We are the first to explain the anomalous C-spread with the credit spread of the corporates involved in the emission trading scheme. We obtain statistical evidence that the C-spread is cointegrated with both this credit spread and the risk-free interest rate. This finding has a relevant policy implication: the most effective solution to solve the market anomaly is including the EUA in the list of European Central Bank eligible collateral for refinancing operations. This change in the ECB monetary policy operations would greatly benefit the carbon market and the EU green transition.

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  • Michele Azzone & Roberto Baviera & Pietro Manzoni, 2024. "The puzzle of Carbon Allowance spread," Papers 2405.12982, arXiv.org.
    • Handle: RePEc:arx:papers:2405.12982
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