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Price and network dynamics in the European carbon market

Author

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  • Andreas Karpf

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Antoine Mandel

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Stefano Battiston

    (CAMS - Centre d'Analyse et de Mathématique sociales - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper presents an analysis of the European Emission Trading System as a transaction network. It is shown that, given the lack of well-identified trading institutions, industrial actors had to resort to local connections and financial intermediaries to participate in the market. This gave rise to a hierarchical structure in the transaction network. It is then shown that the asymmetries in the network induced market inefficiencies (e.g., increased bid-ask spread) and informational asymmetries, that have been exploited by central agents at the expense of less central ones. Albeit the efficiency of the market has improved from the beginning of Phase II, the asymmetry persists, imposing unnecessary additional costs on agents and reducing the effectiveness of the market as a mitigation instrument.

Suggested Citation

  • Andreas Karpf & Antoine Mandel & Stefano Battiston, 2018. "Price and network dynamics in the European carbon market," PSE-Ecole d'économie de Paris (Postprint) halshs-01905985, HAL.
    • Handle: RePEc:hal:pseptp:halshs-01905985
    DOI: 10.1016/j.jebo.2018.06.019
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01905985
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    2. Estelle Cantillon & Aurélie Slechten, 2023. "Market Design for the Environment," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    3. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    4. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    5. Flori, Andrea & Borghesi, Simone & Marin, Giovanni, 2024. "The environmental-financial performance nexus of EU ETS firms: A quantile regression approach," Energy Economics, Elsevier, vol. 131(C).
    6. Yifei Hua & Feng Dong, 2019. "China’s Carbon Market Development and Carbon Market Connection: A Literature Review," Energies, MDPI, vol. 12(9), pages 1-25, May.
    7. Böning, Justus & Di Nino, Virginia & Folger, Till, 2023. "Benefits and costs of the ETS in the EU, a lesson learned for the CBAM design," Working Paper Series 2764, European Central Bank.
    8. Esmalifalak, Hamidreza, 2022. "Euclidean (dis)similarity in financial network analysis," Global Finance Journal, Elsevier, vol. 53(C).
    9. Zhong, Meirui & Zhang, Rui & Ren, Xiaohang, 2023. "The time-varying effects of liquidity and market efficiency of the European Union carbon market: Evidence from the TVP-SVAR-SV approach," Energy Economics, Elsevier, vol. 123(C).
    10. Jiqiang Wang & Yinpeng Liu & Ying Fan & Jianfeng Guo, 2020. "The Impact of Industry on European Union Emissions Trading Market—From Network Perspective," Energies, MDPI, vol. 13(21), pages 1-16, October.
    11. Rahel Mandaroux & Chuanwen Dong & Guodong Li, 2021. "A European Emissions Trading System Powered by Distributed Ledger Technology: An Evaluation Framework," Sustainability, MDPI, vol. 13(4), pages 1-21, February.
    12. Chen, Fanglin & Chen, Zhongfei & Zhang, Xin, 2024. "Belated stock returns for green innovation under carbon emissions trading market," Journal of Corporate Finance, Elsevier, vol. 85(C).
    13. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    14. Jan Abrell & Johanna Cludius & Sascha Lehmann & Joachim Schleich & Regina Betz, 2022. "Corporate Emissions-Trading Behaviour During the First Decade of the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 47-83, September.

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    More about this item

    Keywords

    Network; Carbon market; Climate change; Microstructure;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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