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Carbon pricing in the EU: fundamentals or market sentiment?

Author

Listed:
  • Andrea Gazzani

    (Bank of Italy)

  • Marco Taboga

    (Bank of Italy)

Abstract

The determinants of secondary-market price changes in EU emission allowances (EUAs), the main carbon-pricing tool in the European Union, are still largely unknown. Using a VAR model that combines data at different frequencies and exploits shock-based restrictions, we investigate the role of four potential drivers: i) EUA supply and, more in general, the EU's carbon policy; ii) the business cycle; iii) the emission intensity of output; iv) market sentiment or financial factors. According to our model, carbon policy and financial factors explain the bulk of the variability in EUA prices, while the business cycle and the emission intensity play a more marginal role.

Suggested Citation

  • Andrea Gazzani & Marco Taboga, 2024. "Carbon pricing in the EU: fundamentals or market sentiment?," Questioni di Economia e Finanza (Occasional Papers) 901, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_901_24
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2024-0901/QEF_901_24.pdf
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    More about this item

    Keywords

    EU allowances; emission trading scheme; VARs; real-time decomposition;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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