Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS
This study employed co-integration methodology to explore the fundamental drivers of carbon price in the European Union Emissions Trading System (EU ETS) during the transition from phase Ⅲ to phase Ⅳ, focusing on the interactions between the carbon market, energy sector, and macroeconomic factors. A...
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AIMS Press
2025-02-01
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| Series: | AIMS Environmental Science |
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| Online Access: | https://www.aimspress.com/article/doi/10.3934/environsci.2025008 |
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| author | Adnane Moulim Sid'Ahmed Soumbara Ahmed El Ghini |
| author_facet | Adnane Moulim Sid'Ahmed Soumbara Ahmed El Ghini |
| author_sort | Adnane Moulim |
| collection | DOAJ |
| description | This study employed co-integration methodology to explore the fundamental drivers of carbon price in the European Union Emissions Trading System (EU ETS) during the transition from phase Ⅲ to phase Ⅳ, focusing on the interactions between the carbon market, energy sector, and macroeconomic factors. A novel approach of bilaterally modifying dummy variables was used to include the impact of regulatory event announcements on the EU carbon price. Long-term analysis revealed that coal prices exhibited a positive but statistically insignificant impact, while natural gas and oil prices show substantial and significant influences. Short-term dynamics indicated a self-adjusting mechanism, with gas and oil prices playing crucial roles. We found that the European stock market has a dampening effect on short-term carbon prices, whereas the commodity market exerted a counteractive force. In the energy sector, variations in European gas prices and shifts in nonrenewable electricity generation significantly influence short-term carbon price. Regulatory event announcements exhibited an overall negative and statistically significant trend. However, the relatively small magnitude of these coefficients underscored the modest impact of regulatory event announcements on short-term carbon prices within the EU ETS. Additionally, our study estimated the long-term equilibrium relationship between variables using ridge regression, serving as a proxy for the EU's equilibrium carbon price. We examined the disparities between this equilibrium and market prices. Two distinct phases emerged in the analysis. Before April 2018, the market price consistently lagged behind the equilibrium, suggesting an overestimation of the value of carbon emission rights. Subsequently, the market price consistently surpassed the equilibrium. In particular, the sharp increase in carbon prices from April to June 2020, driven by the COVID-19 pandemic, highlighted the sensitivity of the EU carbon market to external shocks. |
| format | Article |
| id | doaj-art-2247bff20e1d4bf695bac87791d6ce0f |
| institution | DOAJ |
| issn | 2372-0352 |
| language | English |
| publishDate | 2025-02-01 |
| publisher | AIMS Press |
| record_format | Article |
| series | AIMS Environmental Science |
| spelling | doaj-art-2247bff20e1d4bf695bac87791d6ce0f2025-08-20T03:08:59ZengAIMS PressAIMS Environmental Science2372-03522025-02-0112116519210.3934/environsci.2025008Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETSAdnane Moulim0Sid'Ahmed Soumbara1Ahmed El Ghini2Laboratory of Economic Analysis and Modeling (LEAM), Faculty of Law, Economics and Social Sciences-Souissi, Mohammed V University in Rabat, MoroccoLaboratory of Economic Analysis and Modeling (LEAM), Faculty of Law, Economics and Social Sciences-Souissi, Mohammed V University in Rabat, MoroccoLaboratory of Economic Analysis and Modeling (LEAM), Faculty of Law, Economics and Social Sciences-Souissi, Mohammed V University in Rabat, MoroccoThis study employed co-integration methodology to explore the fundamental drivers of carbon price in the European Union Emissions Trading System (EU ETS) during the transition from phase Ⅲ to phase Ⅳ, focusing on the interactions between the carbon market, energy sector, and macroeconomic factors. A novel approach of bilaterally modifying dummy variables was used to include the impact of regulatory event announcements on the EU carbon price. Long-term analysis revealed that coal prices exhibited a positive but statistically insignificant impact, while natural gas and oil prices show substantial and significant influences. Short-term dynamics indicated a self-adjusting mechanism, with gas and oil prices playing crucial roles. We found that the European stock market has a dampening effect on short-term carbon prices, whereas the commodity market exerted a counteractive force. In the energy sector, variations in European gas prices and shifts in nonrenewable electricity generation significantly influence short-term carbon price. Regulatory event announcements exhibited an overall negative and statistically significant trend. However, the relatively small magnitude of these coefficients underscored the modest impact of regulatory event announcements on short-term carbon prices within the EU ETS. Additionally, our study estimated the long-term equilibrium relationship between variables using ridge regression, serving as a proxy for the EU's equilibrium carbon price. We examined the disparities between this equilibrium and market prices. Two distinct phases emerged in the analysis. Before April 2018, the market price consistently lagged behind the equilibrium, suggesting an overestimation of the value of carbon emission rights. Subsequently, the market price consistently surpassed the equilibrium. In particular, the sharp increase in carbon prices from April to June 2020, driven by the COVID-19 pandemic, highlighted the sensitivity of the EU carbon market to external shocks.https://www.aimspress.com/article/doi/10.3934/environsci.2025008eu etscarbon priceenergy pricescointegration |
| spellingShingle | Adnane Moulim Sid'Ahmed Soumbara Ahmed El Ghini Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS AIMS Environmental Science eu ets carbon price energy prices cointegration |
| title | Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS |
| title_full | Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS |
| title_fullStr | Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS |
| title_full_unstemmed | Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS |
| title_short | Cointegration analysis of fundamental drivers affecting carbon price dynamics in the EU ETS |
| title_sort | cointegration analysis of fundamental drivers affecting carbon price dynamics in the eu ets |
| topic | eu ets carbon price energy prices cointegration |
| url | https://www.aimspress.com/article/doi/10.3934/environsci.2025008 |
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