A model of carbon price interactions with macroeconomic and energy dynamics
Chevallier, Julien (2011), A model of carbon price interactions with macroeconomic and energy dynamics, Energy Economics, 33, 6, p. 1295–1312. http://dx.doi.org/10.1016/j.eneco.2011.07.012
TypeArticle accepté pour publication ou publié
Journal nameEnergy Economics
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Abstract (EN)his paper develops a model of carbon pricing by considering two fundamental drivers of European Union Allowances : economic activity and energy prices. On the one hand, economic activity is proxied by aggregated industrial production in the EU 27 (as it provides the best performance in a preliminary forecasting exercise vs. other indicators). On the other hand, brent, natural gas and coal prices are selected as being the main carbon price drivers (as highlighted by previous literature). The interactions between the macroeconomic and energy spheres are captured in a Markov-switching VAR model with two states that is able to reproduce the ‘boom–bust’ business cycle (Hamilton (1989)). First, industrial production is found to impact positively (negatively) the carbon market during periods of economic expansion (recession), thereby confirming the existence of a link between the macroeconomy and the price of carbon. Second, the brent price is confirmed to be the leader in price formation among energy markets (Bachmeier and Griffin (2006)), as it impacts other variables through the structure of the Markov-switching model. Taken together, these results uncover new interactions between the recently created EU emissions market and the pre-existing macroeconomic/energy environment.
Subjects / KeywordsEnergy prices; Economic activity; Carbon price; Markov-switching model
Showing items related by title and author.
European carbon prices fundamentals in 2005-2007: the effects of energy markets, temperatures and sectorial production Chevallier, Julien; Alberola, Emilie; Chèze, Benoît (2007-10) Communication / Conférence
The EU emissions trading scheme : The effects of industrial production and CO2 emissions on carbon prices Alberola, Emilie; Chevallier, Julien; Chèze, Benoît (2008) Article accepté pour publication ou publié