What Happened to the CER Market? A Dynamic Linkage Effect Analysis

Yaqi Wu,Yu Yang,Wei Cao,Po Yun,Xianzi Yang,Chen Zhang

doi:10.1109/access.2020.2983429

Abstract

The certified emission reduction (CER) carbon trading market promoted by the clean development mechanism (CDM) has become an important platform for the development of the international carbon market. However, the CER carbon market has shown unsteady development with the present phenomena of price decrease, transaction inactivity, and recession. Against this backdrop, this study aims to explore the intuition behind CER price volatility from the new perspective of internal and external market dynamic linkages. By introducing three homogeneous carbon products of CER futures, namely, the daily dataset of CER spot, EUA (European Union Allowance) spot and EUA futures, and taking five heterogeneous market drivers comprising stock, exchange rates, coal, crude oil, and natural gas into account, we analyze the dynamic correlations and volatility spillovers between CER futures returns and these influencing factors using the DGC-MSV model. With sample data from January 2013 to May 2019, our empirical results show a persistent dynamic dependence between CER futures price and its factors. The homogeneous and heterogeneous markets have significant positive and negative spillover effects, respectively, on the CER futures market. The decline of CER futures price in the post-Kyoto era is due to two aspects: fluctuation of the exchange rate market, which is closely connected to the settlement of currency, and coal price volatility in energy markets. However, the CER futures market has no obvious spillover effect on other markets, except for its strong impact on the CER spot market and weak information spillover to the exchange rate market. Overall, this finding indicates the feeblest financial property of CER carbon futures market.

Highlights

In recent years, effective controls over greenhouse gas (GHG) emission, especially carbon emission, have received increasing attention from international scholars and political circles [1]
Methodologically, we introduce the combination of the multivariate SV (MSV) model based on Bayesian theory, which can synchronously investigate the dynamic correlations and volatility spillovers between two markets
The lack of research on the dynamic linkages between certified emission reduction (CER) and various market prices in existing literature may cause the omission of the dynamic portfolio, volatility forecasting, and risk management in the CER carbon market, which is of paramount importance for policymakers and investors

Summary

Introduction

Effective controls over greenhouse gas (GHG) emission, especially carbon emission, have received increasing attention from international scholars and political circles [1]. The carbon trading market of CER developed by the CDM is the only global carbon emissions trading market that connects developed and developing countries. Under the Kyoto Protocol, CDM allows developed parties to invest in emission reduction projects in. Developing countries and claim CER for emission reductions. Such abatement might be cheaper than what could have been achieved from the partners of developing countries. Developing countries are willing to obtain funds and technologies through carbon trading. In this way, these countries help CDM projects achieve a ‘‘win-win’’ effect [4], promoting the development of the energy markets and the CER carbon market. CER price may be regarded as a proxy of the ‘‘world’’ carbon price because it represents carbon assets exchangeable at a global scale within the Kyoto Protocol [6]

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Conclusion