Abstract
The last decade has witnessed a significant growth in biodiesel production in order to mitigate the adverse impact of CO2 emissions. Given that the EU biodiesel is mainly produced from rapeseed oil, higher carbon taxes are likely to raise the production of biodiesel which, in turn, increase the prices of this important edible oil. Nevertheless, the association between the EU emission trading scheme and the biodiesel market remains understudied. In this paper, we aim to fill this vacuum in the existing literature. Adopting a bivariate DCC-GARCH model, we show that risk significantly transmits from emission market to the EU rapeseed oil market suggesting that volatile carbon prices would cause uncertainties in the rapeseed oil price index. We also find that an increase in the emission prices tends to promote the biodiesel feedstock prices. Implications of the results are discussed as well.
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