Influences from the European Parliament on EU Emissions Prices

Abstract

The decisions of the European Parliament (EP) are shown to influence both EU emission allowance (EUA) prices and volatility. This is not a universal influence though, only the decisions which are either (i) parliament-led, as opposed to topical decisions originating from the political groups, (ii) made during times of low market sentiment or (iii) made during times of low market awareness, reduce the price and increase the volatility. Daily EUA prices from 2007 to 2014 are used in the study, with decisions analysed using an event study approach for price impact, and a GARCH specification for volatility impact. Our findings suggest the need for policymakers to improve communication of long-term strategies for the EUA market in order to reduce the evident ongoing uncertainty experienced by traders around each decision made by the EP. The sentiment findings indicate a need to consider market dynamics in terms of decision timing so that market turbulence is not an unintended by-product of an EP decision.