California's carbon market and energy prices: a wavelet analysis

Abstract

Carbon price is a key variable in management and risk decisions in activities related to the burning of fossil fuels. Different major players in this market, such as polluters, regulators and financial actors, have different time horizons. We use innovative multivariate wavelet analysis tools, including partial wavelet coherence and partial wavelet gain, to study the link between carbon prices and final energy prices in the time and frequency dimensions in California's carbon market, officially known as the California cap-and-trade programme. We find that gasoline prices lead an anti-phase relation with carbon prices. This result is very stable at lower frequencies (close to 1-year period cycles), and it is also present before mid-2015 in the 20-34 weeks frequency band. Regarding electricity, we find that at about a 1-year period, a rise in carbon prices is reflected in higher electricity prices. We conclude that the first 5 years of compliance of the California cap-and-trade programme show that emissions trading is a significant measure for climate change mitigation, with visible rising carbon prices. The quantitative financial analytics we present supports the recent decision to extend the current market to 2030 without the need for complementary carbon pricing schemes.This article is part of the theme issue 'Redundancy rules: the continuous wavelet transform comes of age'.

Estimating the income inequality-health relationship for the United States between 1941 and 2015: Will the relevant frequencies please stand up?

“…Reflecting the relevant literature, the number of contributions employing this approach is steadily increasing. For instance, it has been used to discuss cycles in politics (Aguiar-Conraria and Soares (2012, 2013)), the estimation of the Taylor rule (Aguiar-Conraria et al (2018a)), the analysis of (regional) house price cycles and the role of monetary policy (Klarl (2016) and Flor and Klarl (2017)) or the investigation of California's carbon market and energy prices (Aguiar-Conraria et al (2018b)). We further use the recently introduced concept of the so-called partial wavelet gain (see Aguiar-Conraria et al (2018a, 2018b, Verona (2019)) in order to quantify the magnitude of the impact of income inequality on health.…”

Introduction to redundancy rules: the continuous wavelet transform comes of age

“…There is now a vast range of papers covering stock market indices, commodity pricing, option values and so on. The paper by Aguiar-Conraria et al [13] is an excellent description of the financial interaction between carbon prices and final energy prices in California's carbon market using univariate, bivariate and multivariate wavelet coherency tools.…”

“…The energy spectrum (the squared magnitude of the Fourier transform) is given by 13) The integral of this gives the energy of the Morlet wavelet which is equal to unity according to our definition given by equation (A 11).…”

Investment, Tobin's Q, and Cash Flow Across Time and Frequencies

“… Other contributions using CWT analysis include Rua (), Aguiar‐Conraria, Martins and Soares (, ), Verona () and Aguiar‐Conraria, Soares and Sousa () (the latter paper also makes use of the concepts of partial phase‐differences and partial gains). The early papers in economics using wavelets (Ramsey and Lampart, ,b) rely on the discrete wavelet transform.…”

“… Following Aguiar‐Conraria, Martins and Soares (), significance levels for the WPS were computed using a chi‐squared distribution as the theoretical distribution, assuming a flat spectrum as the null. In the coherency charts, significance levels were obtained by bootstrapping with 5,000 replications.…”