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ABSTRACT
Due to the increasing concern about environmental issues, carbon emission exchange as a market-driven reduction approach has gained widespread attention in recent years. In this study, the price mechanism of the European Union Emission Trading System (EU ETS) is analyzed over its first two phases. After a detailed description of the European Union Allowance (EUA) price movements in the last several years, efforts are made to explore some methods to model returns of emission allowances and the EGARCH (1, 1)-t model is suggested for modeling. Then estimation and forecasting are made based on the two phases that the EU ETS identified. Results strongly suggest that both price mechanism and volatility are dramatically different between Phase I and Phase II.
ACKNOWLEDGMENTS
Our study was sponsored by the China innovative group fund of scientific foundation (70921001) and China key project in philosophy and social science of Education Department (08JZD0016, 10JZD0020).
Notes
Usually we set natural number e as base number and take the form of logarithm of returns.
GARCH effect means that volatility can be explained by an auto regression model and volatility in the future can be forecasted by historical volatility.
Generalized Error Distribution.
