December 5, 2010

Explaining European Emission Allowance Price Dynamics: Evidence from Phase II

by Wilfried Rickels, Dennis Görlich, Gerrit Oberst

- We investigate the extent to which allowance price dynamics can be explained by market fundamentals. We empirically test for the influence of fuel prices, economic activity, and weather variations. Fuel prices allow to test for fuel switching from coal to gas, the most important short-term abatement option for most installations in the EU-ETS. The empirical results show a significant influence of gas, coal, and oil prices, of economic activity and of some weather variations. When including the relative price of coal to gas on a forward level, we found evidence of a switching effect. Yet, on a spot level the demand effect seems to dominate.

Rickels, W., D. Görlich, G. Oberst (2010). "Explaining European Emission Allowance Price Dynamics: Evidence from Phase II." Kiel Working Paper No. 1650, Oct 2010.