Integration of the Global Carbon Markets

51 Pages Posted: 27 Jan 2010 Last revised: 24 May 2014

See all articles by Bruce Mizrach

Bruce Mizrach

Rutgers University, Department of Economics

Date Written: December 14, 2010

Abstract

This paper analyzes the market architecture and common factors of emission reduction instruments in Europe and North America. Spot and futures prices across exchanges in Europe are cointegrated, but the futures curve beyond the calendar year evolves independently. Despite narrower spreads, political uncertainties about the Clean Development Mechanism have kept EUA and CER prices from converging. RGGI allowances share a common trend with EUA, and the European markets adjust to the U.S. price trend. A $0.10 shock to RGGI prices leads to a one-month $0.64 cumulative increase in EUA prices . The introduction of cap and trade legislation in the U.S. has broken a cointegrating relationship in voluntary prices. Voluntary instruments that are convertible into mandatory allowances imply less than a 20% probability of price convergence between the U.S. and Europe by 2013.

Keywords: carbon, greenhouse gases, emission allowances, market architecture, cointegration

JEL Classification: G13, G32, E44

Suggested Citation

Mizrach, Bruce, Integration of the Global Carbon Markets (December 14, 2010). Available at SSRN: https://ssrn.com/abstract=1542871 or http://dx.doi.org/10.2139/ssrn.1542871

Bruce Mizrach (Contact Author)

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