Abstract
For decades, humans have been consuming large quantities of oil, coal and natural gas. Consequently, people must now take responsibility for having participated in productive activities that have caused the emissions of greenhouse gas (GHG) which has damaged the environment and caused problems associated with abnormal weather. Previous studies investigated the relationships between energy and carbon prices, between oil price and stock index, or between carbon price and macro-economic factors. Few have examined the relationships among EUA spot price, oil price and the stock index in individual nations. Owing to the fact that the European Emissions Trading Scheme (EU ETS) is the world's first carbon market and remains the largest globally, this study, based on the finding of Chevallier (2009) that capital markets are closely related to the commodity markets, examines the long-term equilibrium relationship and causality among European Union Allowance (EUA) spot price, Brent oil price and three European major stock indices from January 1, 2005 to Dec. 31, 2012. The sample period is further divided into three sub-periods of 2005 to 2007 (Phase 1 of the EU ETS), 2008 to 2010 (US subprime loan crisis and the first period of Phase 2 of the EU ETS), and 2011 to 2012 (European debt crisis and the second period of Phase 2 of the EU ETS). Numerous notable findings from the empirical findings are presented. First, EUA spot price, oil price and DAX index are co-integrated with each other during the second sub-period. Although oil price can be adjusted to the long-term equilibrium in German stock market during that period, adjusting EUA spot price to long-term equilibrium is rather difficult. Next, oil price is affected by EUA spot price unilaterally for the full sample period and the third sub-period. Moreover, EUA spot price is unaffected by any factor except itself during the first sub-period, and is affected by three European stock indices for the full sample period, and the third sub-period. Furthermore, the most explanatory power for Brent oil and EUA spot prices arises from themselves, respectively. Finally, the capital markets and commodity markets are closely related during the 2nd sub-period only.
Highlights
Industrialized revolution has, since the 19th century, dramatically transformed production and economic activities
This study focuses on the following objectives: examine the causality among the Brent oil price, European Union Allowances (EUA) spot price and three European stock indices; investigate whether there is a long-term equilibrium relationship among oil and EUA spot prices and three European stock indices, explore the explanatory power of the impact of oil and EUA spot prices as well as three European stock indices on oil and EUA spot prices, and examine whether the capital markets are closely related to the commodity markets during these three sub-periods
By using variance decomposition analysis, this study summarizes how each structure shock impacts the endogenous variables at Table 9: (1) As for the OIL variance decomposition analysis, the only explanatory power on the shocks to OIL at the first term arises from OIL itself for all periods
Summary
Industrialized revolution has, since the 19th century, dramatically transformed production and economic activities. Humans consume large quantities of oil, coal and natural gas, all of which are non-renewable. Oil adversely impacts the environment, as evidenced by the Greenhouse effect that contributed to global warming. Approved on December 11, 1997 to set anthropogenic greenhouse gas (GHG) emission reduction targets for individual nations, the Kyoto Protocol was enacted on February 16, 2005. Seven years later, during Doha climate change talks held on December 8, 2012, 37 countries recommitted their efforts to reduce GHG emissions 21% below 1990 level from January 1, 2013 to December 31, 2020. This treaty covers only 15% of the GHGs worldwide
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