Abstract
In order to depict the complex price volatility of carbon emission permits under the European Union Emission Trading Scheme (EU ETS) accurately, we use the multifractal analysis based on wavelet leaders to extract the useful information from the carbon price series in this paper. Firstly, we test the multifractal property of the EU carbon market, and the empirical results show that the three phases of the EU ETS have shown significant multifractal characteristics. Compared with the other two phases, the multifractal characteristics of phase three are the strongest and the prices are the most uneven. Then, based on the width of the multifractal spectrum and the variances of the Hausdorff dimension, we innovatively propose an indicator VhS which has been proved to be effective in depicting the price volatility of the European carbon market. This paper provides a new train of thought for the risk identification and management in the multifractal market.
Highlights
With the aim of preventing the excessive greenhouse gases emissions from bringing irreversible effect on the environment and human society, the international community made mandatory emission reduction task for the each participating nation via the Kyoto Protocol
During the pilot phase of European Union Emission Trading Scheme, the European Union allowances (EUAs) prices dropped from a peak of 30 Euro to near zero, because of the regulation of “No Banking” and excessive releases of EUAs
By comparing variances with VhS in every phase, we find that the indicator VhS can describe the range of carbon price fluctuations just as the variance do, and can capture the complex behaviors of price fluctuations sensitively
Summary
With the aim of preventing the excessive greenhouse gases emissions from bringing irreversible effect on the environment and human society, the international community made mandatory emission reduction task for the each participating nation via the Kyoto Protocol. Liang duction as much as possible, the so-called carbon trading markets were established among participating nations. The European Union Emission Trading Scheme, New South Wales Greenhouse Gas Abatement Scheme in Australia and the American emissions trading system are the famous carbon trading markets in the world. These carbon trading markets can improve the allocation efficiency of the carbon emission permits. During the pilot phase of European Union Emission Trading Scheme, the European Union allowances (EUAs) prices dropped from a peak of 30 Euro to near zero, because of the regulation of “No Banking” and excessive releases of EUAs. The highly volatile carbon prices have brought a huge challenge to the market participants and regulators. The purpose of this paper is to find out a way to depict the volatility characteristics of carbon prices accurately which may have a vital practical significance for the trading and risk management in the carbon market
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