Abstract
This study analyzes the impacts of different drivers on the pricing of EU carbon futures in various periods by using the time-varying parameter vector autoregressive (TVP-VAR) model. The results indicate that: (1) The relationships between oil, gas, electricity, stock prices and carbon price have significant time-varying characteristics and those relationships have experienced an inversion in 2016. This might be due to the pressure of achieving the “EU 20-20-20” targets and the signing of the Paris Agreement as well as the fine-tuning of the European Union Emissions Trading Scheme (EU ETS). (2) The impacts of different drivers on carbon price are various. The carbon price is more sensitive to oil, gas, electricity prices as well as the stock price before the inversion in the short-term, while its response to changes in the stock price after the inversion is more obvious in the mid-long term. (3) After the signing of the Paris Agreement in the second quarter of 2016, the carbon price has a greater response to changes in its drivers. The oil price’s impact on carbon price became the most significant one among them.
Highlights
The issue of global warming is affecting the sustainable development of the economy and society seriously
The vector autoregressive (VAR) model adopts the form of multiple equations simultaneously, which can reflect the dynamic relationship between different variables and deal with the problem of endogenous variables well
There is no homoscedasticity in the assumption of the TVP-VAR model, which is more in line with the actual situation, and the model has the nature of time-varying parameters, which can better capture the relationship and characteristics of the carbon price in different eras
Summary
The issue of global warming is affecting the sustainable development of the economy and society seriously. The carbon emission trading system commercializes carbon emission rights and internalizes external costs (Twomey, 2012; Wesseh et al, 2017). This trading system currently is one of the policy tools being used to control carbon emissions effectively. During the past few years, studies related to the carbon market, carbon emissions, and carbon price have received extensive attention in the field of energy and climate economics (Chevallier, 2009; Keppler and Mansanet-Bataller, 2010; Creti et al, 2012; Hammoudeh et al, 2015; Naeem et al, 2020; Muhammad and Long, 2021). Previous studies have shown that the energy market, electricity market, and financial market can have a significant impact on carbon
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