Carbon Markets - Microstructure, Pricing and Policy

Acknowledgements

Contents

List of Abbreviations

List of Figures

List of Tables

1: An Introduction to the Book

References

2: Emissions Trading in Europe: Background and Policy

2.1 Introduction

2.2 Trading Emissions Under Cap and Trade

2.3 Structure of the EU-ETS

2.3.1 Emissions Permits Creation and Use

2.4 Critical Phase-Dependent Issues Arising from EU-ETS Design and Regulations

2.4.1 The Problem with Ban on Intertemporal Trading

2.4.2 The Problem with Initial Allocation in Phase I

2.4.3 Carbon Price in the EU-ETS

2.4.4 Impact of the Global Financial Crisis on the EU-ETS

2.4.5 Regulatory Risk Issues in the EU-ETS

2.5 Chapter Summary

References

3: Price Discovery and Trading After Hours on the ECX

3.1 Introduction

3.2 The Trading Environment on the ECX

3.3 Data

3.3.1 Sample Selection

3.3.2 Sample Description

3.4 Results and Discussion

3.4.1 Trading Volume and Volatility

3.4.2 Motivation for Trading During the AMC: Liquidity or Information?

3.4.3 Adverse Selection Costs and Spread Analyses

3.4.3.1 Madhavan et al.’s (1997) Spread Decomposition Model

3.4.3.2 Estimating Madhavan et al.’s (1997) Spread Decomposition Model

3.4.3.3 Huang and Stoll’s (1997) Three-Way Spread Decomposition Model Based on Portfolio Trading Pressure

3.4.3.4 A Simple Model

3.4.3.5 Extension of Model Based on Portfolio Trading Pressure

3.4.4 Price Discovery and Information Absorption on the ECX

3.4.4.1 Weighted Price Contribution

3.4.4.2 Weighted Price Contribution per Trade

3.4.5 Efficiency of the Price Discovery Process: Period by Period Analysis

3.5 Chapter Summary

References

4: The Price Impact of Block Emissions Permit Trades

4.1 Introduction

4.2 Background to Study

4.2.1 Institutional Set-up

4.3 Data and Methodological Approach

4.3.1 Data

4.3.2 Methodology

4.4 Results and Discussion

4.4.1 Descriptive Statistics

4.4.2 Regression Results and Discussion

4.4.2.1 Price Impact and Trade Sign

4.4.2.2 Intraday Variations in Price Impact

4.4.2.3 Day of the Week Effects

4.4.2.4 Trade Size Dependencies on Price Impact

4.5 Chapter Summary

References

5: The Liquidity Effects of Trading Carbon Financial Instruments

5.1 Introduction

5.2 The Trading Environment on the EEX

5.3 Data

5.3.1 Sample Selection

5.3.2 Sample Description

5.4 Results and Discussion

5.4.1 Abnormal Return of Events: Dec-2008 and Dec-2009 Contracts

5.4.2 Impact of Events on Trading Volumes: Dec-2008 and Dec-2009 Contracts

5.4.2.1 Short-Term Impact of Events

5.4.2.2 Long-Term Impact of Events

5.4.3 Financial Markets Liquidity

5.4.4 Measures of Liquidity

5.4.4.1 Volume-Based Measures

5.4.4.2 Price Movement and Market Resilience Measures

5.4.4.3 Transaction Cost Measures

5.4.5 Liquidity Improvements: EEX EUA Dec-2008 and Dec-2009 Contracts

5.5 Chapter Summary

References

6: Liquidity and Market Efficiency in Carbon Markets

6.1 Introduction

6.2 Data

6.2.1 Order Imbalance and Return Measures

6.2.2 Liquidity Measures

6.3 Results and Discussion

6.3.1 Summary Statistics

6.3.2 Correlations

6.3.3 Predictive Regressions, Market Efficiency and Liquidity

6.3.4 Granger Causality Analyses

6.3.5 Variance Ratios: Measuring Randomness of Returns

6.4 Chapter Summary

References

7: The Future

7.1 Policy Discussion

7.1.1 Design of Regulations

7.1.2 Dealing with Excess Emission Allowances in Phase III: Backloading and the Market Stability Reserve

7.1.3 Financial Regulation of the EU-ETS

References

Bibliography

Index