Carbon prices. Dynamic analysis of European and Californian markets

Dissertação para obtenção do Grau de Doutor em Alterações Climáticas e Políticas de Desenvolvimento Sustentável

Carbon markets’ goal is to promote the reduction of emissions of greenhouse gases where it is most cost-efficient. This makes the price of the tradable good – carbon dioxide equivalent (CO2e) - a key variable in management and risk decisions, in markets related to activities connected with the burning of fossil fuels, such as power generation. This work aims to improve the analysis of carbon prices’ dynamics, considering the possibility of multidirectional effects between prices of CO2e, energy (primary and final), offsets licenses and the economy performance, in various frequencies. The two main research questions are: (i) what drives carbon price variations? (ii) what variations do carbon prices drive? We used two comple-mentary methodologies: (a) a vector autoregression model (of common use in macroeconomics and financial markets but not in carbon-energy relations), which allows the analysis of causality and of impulse-response functions of daily prices; and (b) an innovative multivariate wavelet analysis, which allows us to understand the relationship and causal link between the variables in the time and frequency dimensions, particularly in longer cycles (4~8 and 8~20 months), not perceived in previous studies. As case studies we considered the European (EU ETS) and Califor-nia (AB32) carbon markets. This is the first research to present the analysis of the referred US market. The analysis covers the 2008-2013 period, intentionally excluding the EU ETS phase I, for greater consistency of results. Results suggest that the economy and electricity drive the price of European carbon, while gas and oil have a greater role in California. So, there is a greater influence of final energy prices in the most mature market. We also observe that the price of CERs does not affect the European carbon price. On the other hand, this study shows for the first time that carbon prices have impacts on electricity prices over longer cycles (8~20 months) and in coal over short cycles (lim-ited to the first days). It is suggested that the carbon market has more significant effects in longer cycles. The price of European carbon also has impact in CERs prices. The results are statistically significant and relevant, and will improve the quality of decision making of all parties involved in the energy and carbon markets - polluters and regulators included.