CO2 Emissions Allowances. Modeling the Price Dynamics in the EU Emission Trading System

The aim of this paper is to characterize the daily price fundamentals of European Union Allowances (EUAs) traded in the EU Emissions Trading Scheme (ETS) during the period September 2005 - February 2010. We use GARCH model in order to account for changes in volatility. We split our analysis into two periods according to the two phases of the ETS. We disregard the period 02.04.2007 – 11.08.2008, when the trading in the spot market was practically inexistent and the price of EUAs was smaller than 1 Euro. Our findings suggest that weather data does not have a linear influence, while the coldest days, extremely rainy days and extremely windy days have an important impact during the first period. From energy variables, brent is a sustainable factor. Additionally, electricity and coal seem to be substitutes for each other, with electricity having a negative impact on EUAs prices in the first period and coal in the second. We also find that the change in industrial production is not one of the factors that seem to influence the price of emissions allowances