Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature

Hintermann, Beat, Peterson, Sonja and Rickels, Wilfried (2016) Price and Market Behavior in Phase II of the EU ETS: A Review of the Literature Review of Environmental Economics and Policy, 10 (1). pp. 108-128. DOI 10.1093/reep/rev015.

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Abstract

Since 2005, the EU ETS has provided a market-based price signal for European carbon emissions. This article reviews the literature on the formation of carbon allowance prices during phase II of the EU ETS. A consensus has emerged in the literature that allowance prices are driven by fuel prices and other variables that affect the expected amount of abatement required to meet the EU ETS emissions cap. However, this relationship is not robust, most likely because the relevant abatement technologies change with the economic conditions in which they operate. There is evidence that models that explicitly account for uncertainty about the future demand and supply of allowances are better at explaining allowance price variation during certain periods. However, our understanding of the level of the allowance price remains poor. We cannot say with any degree of confidence whether the allowance price is “right,” in the sense that it reflects marginal abatement costs, or whether there is a price wedge caused by uncertainty, transaction costs, or price manipulation. Nevertheless, we find that the EU ETS market has matured in phase II compared with phase I and that banking of allowances has induced the market to incorporate the future scarcity of allowances and, as intended, to smooth the effect of temporary shocks. We argue that further research is needed in several key areas to increase our understanding of the emissions allowance market provided by the EU ETS.

Document Type: Article
Research affiliation: Kiel University > Kiel Marine Science
OceanRep > The Future Ocean - Cluster of Excellence
Kiel University
Refereed: Yes
DOI etc.: 10.1093/reep/rev015
ISSN: 1750-6816
Projects: Future Ocean
Date Deposited: 05 Feb 2018 09:06
Last Modified: 24 Sep 2019 03:48
URI: http://eprints.uni-kiel.de/id/eprint/41821

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