Impact of Changes in Membership on Prices of a Unified Carbon Market: Case Study of the European Union Emissions Trading System

Abstract

Using the event study methodology, the paper studies the effects of 22 key events in countries’ process of entering and exiting the European Union on returns of European Union Allowance (EUA) future prices in the EU Emissions Trading System (EU ETS). The events include 17 entry events concerning the signing of relevant agreements, becoming a candidate or potential candidate country, the process of a negotiation and formally entering the EU, and five exit events including the process of Brexit and the suspension of Iceland. The results show that two entry events involving Albania and Ukraine, respectively, have a significant positive impact, and five entry events have a significant negative impact. Among the exit events, the announcement of the Brexit referendum results causes significant negative market reaction. Most events regarding small carbon emitters entering the EU lead to negative cumulative abnormal returns (CAR) of EUA prices, and a significant negative correlation between the countries’ annual average carbon emissions and CAR is found, while the change of national allocation plans does not affect the market reaction notably. In the process of establishing a unified carbon market, regulators should carry out appropriate policy arrangements of emission allowances allocation when new members join, in order to guide market expectations and enhance market stability.

Enhancing Carbon Capture and Storage Deployment in the EU: A Sectoral Analysis of a Ton-Based Incentive Strategy

“…Furthermore, the EUA price is rather volatile, with an interdependence with energy (coal, oil, natural gas, and electricity prices), economic (industrial production, economic sentiment, bank lending), and temperature variables [35]. However, the EUA price is vulnerable to unforeseen market shocks, such as the Brexit announcement, which had considerable adverse effects [36] on the market. Furthermore, when shocks occur, the EUA price shows a high responsiveness to its previous price [35].…”

Supply Chain Emission Reduction Decisions, Considering Overconfidence under Conditions of Carbon Trading Price Volatility

“…With the establishment of the EU-ETS, for the first time, a carbon trading price was established in Europe. Most studies on carbon prices have focused on predicting carbon prices [15][16][17][18] and their influencing factors [19][20][21]. For example, Yan made a hybrid model of carbon price prediction based on feature selection and multi-objective optimization algorithms, setting up models with lower errors [22].…”