An Analysis of Decision Factors on the Price of South Korea’s Certified Emission Reductions in Use of Vector Error Correction Model

Sumin Park,Yong-Gil Lee

doi:10.3390/su9101768

Abstract

This study analyzes factors affecting the price of South Korea’s Certified Emission Reduction (CER) using statistical methods. CER refers to the transaction price for the amount of carbon emitted. Analysis of results found a co-integration relationship among the price of South Korea’s CER, oil price (WTI), and South Korea’s maximum electric power demand, which means that there is a long-term relationship among the three variables. Based on this result, VECM (vector error correction model) analysis, impulse response function, and variance decomposition were performed. As the oil price (WTI) increases, the demand for gas in power generation in Korea declines while the demand for coal increases. This leads to increased greenhouse gas (GHG; e.g., CO2) emissions and increased price of South Korea’s CERs. In addition, rising oil prices (WTI) cause a decline in demand for oil products such as kerosene, which results in an increase in South Korea’s maximum power demand.

Highlights

Erratic weather phenomena caused by climate change threatens the survival of mankind
Regarding the VECM analysis, the stability of the time series was verified through the unit root test, and the long-term relationship was examined through the co-integration test
If the co-integration relation is confirmed by way of the co-integration test, the short- and long-term causality can be tested through the VECM as follows

Summary

Introduction

Erratic weather phenomena caused by climate change threatens the survival of mankind. The time-lagged Brent oil price and the coefficient of electricity price were statistically significant at the 1% level. Concerning the daily data analysis, the correlation between the price of the EU’s CER and oil price was high, and the price difference between coal and gas was not statistically significant. The relationship between electricity price and emission price was not statistically significant. Park [24] found that statistically valid pricing factors in prior studies are not valid for South Korea’s CER market. Based on theoretical principles and research experience, we conducted a time series analysis using VECM (vector error correction model) with oil price (WTI) and maximum power demand in South Korea to determine whether South Korea’s CER is consistent with findings in previous studies. It is meaningful to conduct the time series analysis of South Korea’s CER, which has not been tested using time series analysis with oil price (WTI) and South Korea’s maximum power demand prior

Materials and Methodology

Results and Discussion

Methodology

Conclusions