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Transactions in the European carbon market: a bubble of compliance in a whirlpool of speculation

Author

Listed:
  • Nathalie Berta

    (REGARDS - Recherches en Économie Gestion AgroRessources Durabilité Santé- EA 6292 - URCA - Université de Reims Champagne-Ardenne - MSH-URCA - Maison des Sciences Humaines de Champagne-Ardenne - URCA - Université de Reims Champagne-Ardenne)

  • Emmanuelle Gautherat

    (LS-CREST - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique)

  • Ozgur Gun

    (REGARDS - Recherches en Économie Gestion AgroRessources Durabilité Santé- EA 6292 - URCA - Université de Reims Champagne-Ardenne - MSH-URCA - Maison des Sciences Humaines de Champagne-Ardenne - URCA - Université de Reims Champagne-Ardenne)

Abstract

The European Union Emissions Trading Scheme (EU ETS) is supposed to help regulated installations to cover their CO2 emissions by trading in allowances. In practice, the EU ETS is mainly a financial market used for hedging and speculation. This financial feature is regarded as a solution (hedging and liquidity) to a problem (the price risk and volatility imposed on installations) which the market has actually created itself. This paper provides an estimation of the real underpinning of the scheme, i.e. the needs of installations for allowances transfers to achieve compliance in the two first exchange periods. This estimation, which was singularly lacking in the literature, shows that compliance transactions become more and more marginal as market activity grows, and they are drowned in a whirlpool of speculation. This challenges the role of the carbon price, whether it reveals a financial and self-referential evaluation rather than the installations' marginal abatement costs, the condition of cost-effectiveness expected from carbon trading.

Suggested Citation

  • Nathalie Berta & Emmanuelle Gautherat & Ozgur Gun, 2017. "Transactions in the European carbon market: a bubble of compliance in a whirlpool of speculation," Post-Print hal-02095629, HAL.
    • Handle: RePEc:hal:journl:hal-02095629
    DOI: 10.1093/cje/bew041
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    Citations

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    Cited by:

    1. Dan Nie & Yanbin Li & Xiyu Li & Xuejiao Zhou & Feng Zhang, 2022. "The Dynamic Spillover between Renewable Energy, Crude Oil and Carbon Market: New Evidence from Time and Frequency Domains," Energies, MDPI, vol. 15(11), pages 1-28, May.
    2. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Noman, Ambreen, 2021. "The volatility connectedness of the EU carbon market with commodity and financial markets in time- and frequency-domain: The role of the U.S. economic policy uncertainty," Resources Policy, Elsevier, vol. 74(C).
    3. Stephan Schulmeister, 2020. "Fixing long-term price paths for fossil energy: the optimal incentive for limiting global warming," ICAE Working Papers 112, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    4. Stephan Schulmeister, 2019. "Keynes und die Finanzmärkte. Auf halbem Weg vom "homo oeconomicus" zum "homo humanus"," WIFO Working Papers 588, WIFO.
    5. Forbes, Kevin F. & Zampelli, Ernest M., 2019. "Wind energy, the price of carbon allowances, and CO2 emissions: Evidence from Ireland," Energy Policy, Elsevier, vol. 133(C).
    6. Carratù, Maria & Chiarini, Bruno & Piselli, Paolo, 2020. "Effects of European emission unit allowance auctions on corporate profitability," Energy Policy, Elsevier, vol. 144(C).
    7. Tan, Xueping & Sirichand, Kavita & Vivian, Andrew & Wang, Xinyu, 2020. "How connected is the carbon market to energy and financial markets? A systematic analysis of spillovers and dynamics," Energy Economics, Elsevier, vol. 90(C).
    8. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics, revised 2020.
    9. repec:crb:wpaper:2023-01 is not listed on IDEAS
    10. Tan, Xueping & Sirichand, Kavita & Vivian, Andrew & Wang, Xinyu, 2022. "Forecasting European carbon returns using dimension reduction techniques: Commodity versus financial fundamentals," International Journal of Forecasting, Elsevier, vol. 38(3), pages 944-969.

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