How to explain carbon price using market micro-behaviour?

Abstract

ABSTRACTIn this article, we analyse the micro-behaviours of the emitting companies and financial intermediaries in the European Union emissions trading scheme (EU-ETS) and their influence on carbon prices. Based on the full-sample community independent transaction log (CITL), the micro-behaviours can be observed in a closed system. The micro-behaviours of the emitting companies are divided into ‘compliance trading’ and ‘non-compliance trading’ based on the emitting companies’ trading motivations. The micro-behaviours of the financial intermediaries are measured by their influence on the total supply and demand in the market. Then, an AR-GARCH model is established to examine the dynamic relationships between carbon prices and the micro-behaviours of the emitting companies and financial intermediaries. The estimation results suggest that the prices–behaviours relationship is significant. Other important findings are as follows: (1) the mean value of carbon prices positively depends on the compliance trading of the emitting companies and the micro-behaviours of the financial intermediaries; (2) non-compliance buying increases the volatility of carbon prices, while the non-compliance selling stabilizes it and (3) the micro-behaviours of the emitting companies in the lower 50% in terms of emission levels have no significant influence on the mean carbon price, but their non-compliance buying stabilizes the carbon price.