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Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?

Year 2010, Volume: 12 Issue: 12, - , 01.09.2010

Abstract

The European Union’s Emission Trading Scheme (ETS) is the key policy instrument of the European Commissions Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. The key asset traded under the scheme is the European Union Allowance (EUA). To further curtail greenhouse gas emissions the EU Allowance prices should follow a stationary path about a persistent upward trend. In this vein, this article finds evidence to the contrary indicating the presence of a stochastic trend (a unit root) in EU Allowance prices during the period from April 2005 through to July 2009. This finding is indicative of incoherence between the European Union ETS de jure policy, with regard to transiting to a low carbon economy, and EUA price behavior.

References

  • Alberola, E., Chevallier, J., Cheze, B. (2008), “Price Drivers and Structural Breaks in European Carbon Prices 2005-2007”, Energy Policy, 36 (2), 787-797.
  • Alberola, E., Chevallier, J. and Cheze, B. (2009a), “European Carbon Price Fundamentals in 2005-2007: the Effects of Energy Markets, Temperatures and Sectorial Production”, forthcoming in Journal of Policy Modelling.
  • Alberola, E., Chevallier, J., Cheze, B. (2009b), “The EU Emission Trading Scheme: Disentan-gling the Effects of Industrial Production and CO2 Emission on Carbon Prices”, forthcoming in Economie Internationale.
  • Benz, E. and Trück, S. (2009), “Modelling the Price Dynamics of CO2 Emission Allowances”, Energy Economics, 31, 2-15.
  • Bredin, D. and Muckley, C. (2009), “An Analys is of the EU Emission Trading Scheme”, UCD School of Business Working Paper Series.
  • Christiano, L.J. (1992), “Searching for a Break in GNP”, Journal of Business and Economic Statistics, 10, 237-249.
  • Daskalakis, G., Psychoyios, D., and Markellos, R.N. (2009), “Modelling CO2 emission Allowance prices and derivatives: Evidence from the European trading scheme”, forthcoming, Journal of Banking and Finance.
  • Dickey, D.A and Fuller W.A. (1979) “Distributions of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of American Statistical Association, 74 (366), 427-481.
  • Dickey, D.A and Fuller, W.A. (1981), “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root”, Econometrica, 49 (4), 1057-1072.
  • Elliot, G., Rothenberg, T. and J.H. Stock (1996), “Efficient Tests for an Autoregressive Unit Root”, Econometrica 64 (4), 813-836.
  • Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992), “Testing the null hypothesis of stationarity against the alternative of a unit root”, Journal of Econometrics, 54, 159-178.
  • Lee, J. and Strazicich, M.C. (2001), “Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests”, Oxford Bulletin of Economics and Statistics 63, 535-558.
  • Lee, J. and Strazicich, M.C. (2003), “Minimum LM Unit Root Test with Two Structural Breaks”, Review of Economics and Statistics, 63, 1082-1089.
  • Lee, J., Strazicich, M.C. (2004), “Minimum LM Unit Root Test with One Structural Break”, Appelation State University working paper series.
  • Nelson, C.R. and Plosser, C.I. (1982), “Trends and random walks In Macroeconomic Time Series”, Journal of Monetary Economics, 10, 139-162.
  • Nunes, L., Newbold, P. and Kuan, C. (1997), “Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered”, Oxford Bulletin of Economics and Statistics, 59, 435-448.
  • Paolella, M.S. and Taschini, L. (2008), “An Econometric Analysis of Emission Trading Allowances”, Journal of Banking and Finance, 32, 2022-2032.
  • Perron, P. (1989), “The great crash, the oil price shock, and the unit root hypothesis”, Econometrica 57, 1361-1401.
  • Perron, P. (2005), “Dealing with Structural Breaks”, Mimeo in the Vol. 1, Handbook of Econometrics: Econometric Theory.
  • Phillips, P. and Perron, P. (1988), “Testing for a Unit Root in Time Series Regression”, Biometrica, 75, 335-346.
  • Seo, B. (1999), “Distribution theory for unit root tests with conditional heteroskedasticity”, Journal of Econometrics 91, 113-144.
  • Stern, N. (2006), “Short Executive Summary”, Stern Review Report on the Economics of Climate Change, pre-publication edition, HM Treasury, <http://www.hmtreasury.gov.uk/d/CLOSEDSHORTexecutivesummary.pdf>, 28.08.2009.
  • Zivot, E. and Andrews, K. (1992), “Further Evidence on the Great Crash, the Oil Price Shock and the Unit Root Hypothesis”, Journal of Business, Economics and Statistics 10 (10), 251-270.

Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?

Year 2010, Volume: 12 Issue: 12, - , 01.09.2010

Abstract

The European Union’s Emission Trading Scheme (ETS) is the key policy instrument of the European Commissions Climate Change Program aimed at reducing greenhouse gas emissions to eight percent below 1990 levels by 2012. The key asset traded under the scheme is the European Union Allowance (EUA). To further curtail greenhouse gas emissions the EU Allowance prices should follow a stationary path about a persistent upward trend. In this vein, this article finds evidence to the contrary indicating the presence of a stochastic trend (a unit root) in EU Allowance prices during the period from April 2005 through to July 2009. This finding is indicative of incoherence between the European Union ETS de jure policy, with regard to transiting to a low carbon economy, and EUA price behavior.

References

  • Alberola, E., Chevallier, J., Cheze, B. (2008), “Price Drivers and Structural Breaks in European Carbon Prices 2005-2007”, Energy Policy, 36 (2), 787-797.
  • Alberola, E., Chevallier, J. and Cheze, B. (2009a), “European Carbon Price Fundamentals in 2005-2007: the Effects of Energy Markets, Temperatures and Sectorial Production”, forthcoming in Journal of Policy Modelling.
  • Alberola, E., Chevallier, J., Cheze, B. (2009b), “The EU Emission Trading Scheme: Disentan-gling the Effects of Industrial Production and CO2 Emission on Carbon Prices”, forthcoming in Economie Internationale.
  • Benz, E. and Trück, S. (2009), “Modelling the Price Dynamics of CO2 Emission Allowances”, Energy Economics, 31, 2-15.
  • Bredin, D. and Muckley, C. (2009), “An Analys is of the EU Emission Trading Scheme”, UCD School of Business Working Paper Series.
  • Christiano, L.J. (1992), “Searching for a Break in GNP”, Journal of Business and Economic Statistics, 10, 237-249.
  • Daskalakis, G., Psychoyios, D., and Markellos, R.N. (2009), “Modelling CO2 emission Allowance prices and derivatives: Evidence from the European trading scheme”, forthcoming, Journal of Banking and Finance.
  • Dickey, D.A and Fuller W.A. (1979) “Distributions of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of American Statistical Association, 74 (366), 427-481.
  • Dickey, D.A and Fuller, W.A. (1981), “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root”, Econometrica, 49 (4), 1057-1072.
  • Elliot, G., Rothenberg, T. and J.H. Stock (1996), “Efficient Tests for an Autoregressive Unit Root”, Econometrica 64 (4), 813-836.
  • Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992), “Testing the null hypothesis of stationarity against the alternative of a unit root”, Journal of Econometrics, 54, 159-178.
  • Lee, J. and Strazicich, M.C. (2001), “Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests”, Oxford Bulletin of Economics and Statistics 63, 535-558.
  • Lee, J. and Strazicich, M.C. (2003), “Minimum LM Unit Root Test with Two Structural Breaks”, Review of Economics and Statistics, 63, 1082-1089.
  • Lee, J., Strazicich, M.C. (2004), “Minimum LM Unit Root Test with One Structural Break”, Appelation State University working paper series.
  • Nelson, C.R. and Plosser, C.I. (1982), “Trends and random walks In Macroeconomic Time Series”, Journal of Monetary Economics, 10, 139-162.
  • Nunes, L., Newbold, P. and Kuan, C. (1997), “Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered”, Oxford Bulletin of Economics and Statistics, 59, 435-448.
  • Paolella, M.S. and Taschini, L. (2008), “An Econometric Analysis of Emission Trading Allowances”, Journal of Banking and Finance, 32, 2022-2032.
  • Perron, P. (1989), “The great crash, the oil price shock, and the unit root hypothesis”, Econometrica 57, 1361-1401.
  • Perron, P. (2005), “Dealing with Structural Breaks”, Mimeo in the Vol. 1, Handbook of Econometrics: Econometric Theory.
  • Phillips, P. and Perron, P. (1988), “Testing for a Unit Root in Time Series Regression”, Biometrica, 75, 335-346.
  • Seo, B. (1999), “Distribution theory for unit root tests with conditional heteroskedasticity”, Journal of Econometrics 91, 113-144.
  • Stern, N. (2006), “Short Executive Summary”, Stern Review Report on the Economics of Climate Change, pre-publication edition, HM Treasury, <http://www.hmtreasury.gov.uk/d/CLOSEDSHORTexecutivesummary.pdf>, 28.08.2009.
  • Zivot, E. and Andrews, K. (1992), “Further Evidence on the Great Crash, the Oil Price Shock and the Unit Root Hypothesis”, Journal of Business, Economics and Statistics 10 (10), 251-270.
There are 23 citations in total.

Details

Primary Language English
Journal Section Articles
Authors

Don Bredın

Cal Muckley

Publication Date September 1, 2010
Submission Date December 12, 2014
Published in Issue Year 2010 Volume: 12 Issue: 12

Cite

APA Bredın, D., & Muckley, C. (2010). Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?. Sosyoekonomi, 12(12). https://doi.org/10.17233/se.49225
AMA Bredın D, Muckley C. Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?. Sosyoekonomi. June 2010;12(12). doi:10.17233/se.49225
Chicago Bredın, Don, and Cal Muckley. “Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?”. Sosyoekonomi 12, no. 12 (June 2010). https://doi.org/10.17233/se.49225.
EndNote Bredın D, Muckley C (June 1, 2010) Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?. Sosyoekonomi 12 12
IEEE D. Bredın and C. Muckley, “Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?”, Sosyoekonomi, vol. 12, no. 12, 2010, doi: 10.17233/se.49225.
ISNAD Bredın, Don - Muckley, Cal. “Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?”. Sosyoekonomi 12/12 (June 2010). https://doi.org/10.17233/se.49225.
JAMA Bredın D, Muckley C. Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?. Sosyoekonomi. 2010;12. doi:10.17233/se.49225.
MLA Bredın, Don and Cal Muckley. “Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?”. Sosyoekonomi, vol. 12, no. 12, 2010, doi:10.17233/se.49225.
Vancouver Bredın D, Muckley C. Is There a Stochastic Trend in European Union Emission Trading Scheme Prices?. Sosyoekonomi. 2010;12(12).