Examining the structural changes of European carbon futures price 2005–2012

Abstract

The aim of this research was to examine the structural changes of European carbon futures price under the European Union Emissions Trading Scheme during 2005–2012. More specifically, by relying on the daily EU allowance futures contract, we investigate the structural changes of the European carbon futures price. Structural breakpoints are detected based on the iterative cumulative sums of squares algorithm and event study models. The results show that since 2005, there have been three major breakpoints of the European carbon futures price, stemming from the two extreme events of the 2008 global financial crisis and the 2011 European debt crisis. This study contributes to understanding the pricing mechanism of the EU ETS and effectively forecasting carbon prices.

Keywords:

• carbon futures
• structural breakpoint tests
• ICSS algorithm
• event study

JEL Classification:

• C22
• G15
• Q40

Notes

¹ The choice of the S&P is robust to other equity indexes, such as the Euro Stoxx 50. Further results can be accessed upon request to the authors.