Modeling the Price Mechanism of Carbon Emission Exchange in the European Union Emission Trading System

摘要

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.