Skip to main content
SpringerLink
Log in

Understanding the Link Between Aggregated Industrial Production and the Carbon Price

  • Chapter
  • First Online:
Green Energy and Efficiency

Part of the book series: Green Energy and Technology ((GREEN))

Abstract

This chapter assesses the extent to which economic activity and the carbon price are linked. Carbon price drivers can be mainly related to energy and institutional variables. However, the influence of the macroeconomic environment shall not be undermined. Various approaches exist in the literature, which favor financial market variables over macroeconomic variables. Following a review of the state of the EU ETS, the main channel of transmission between the variation of macroeconomic activity and the carbon price is recalled, by using the aggregated industrial production as a proxy. An original empirical application unfolds, by studying the carbon-macroeconomy relationship in the threshold VAR model during 2005–2013. Further research is called upon in nonlinear econometrics.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    See the news release “ EU carbon market oversupplied by 1.7 bln: analysts” dated April 2, 2013 at www.pointcarbon.com

  2. 2.

    Available at www.carbonmarketdata.com. Last accessed October 4, 2012.

  3. 3.

    These figures are calculated at group level, taking into account both minority and majority stakeholdings in other companies included in the EU emissions trading scheme. Figures do not include the EU allowances distributed for free to new entrants, as these data are not shown in the Community Independent Transaction Log (the EU carbon trading registry, also called CITL). A “new entrant” is defined in the EU directive establishing the carbon trading scheme as a new installation, or as an existing installation that has experienced a change of its activity “in the nature or functioning or extension of the installation”. Data on the number of EU carbon allowances distributed to these new entrants are not made available publicly in the EU carbon registry. Only the emissions reports of these installations are published.

  4. 4.

    These three companies all have an energy mix with a high proportion of coal- or lignite-fired electricity generation.

  5. 5.

    These figures include the 27 EU countries except Bulgaria and Cyprus.

  6. 6.

    See the Point Carbon news article at http://www.pointcarbon.com/news/1.1999756. Last accessed October 4, 2012.

  7. 7.

    Air Transport Association of America e.a., v Secretary of State for Energy and Climate Change, Case C-366/10.

  8. 8.

    Available at http://www.pointcarbon.com/news/1.2004752. Last accessed on October 4, 2012.

  9. 9.

    i.e., dividend yields, junk bond yields, T-bill rates and market portfolio excess returns in the Fama-French literature.

  10. 10.

    The EU 27 industrial production index has a base 100 in 2000, and is seasonally adjusted. The index is converted from monthly to daily frequency by using the Matlab function by L. Shure, which performs linear interpolation so that the mean square error between the original data and their ideal values is minimized.

  11. 11.

    An exhaustive search is conducted over all the possible combinations of values of the specified hyper-parameters. These results are not shown here to conserve space, and may be obtained upon request to the author.

  12. 12.

    See [9] for a brief introduction.

References

  1. Aatola P, Ollikainen M, Toppinen A (2013) Price determination in the EU ETS market: Theory and econometric analysis with market fundamentals. Energy Economics 36:380–395

    Article  Google Scholar 

  2. Alberola E, Chevallier J, Cheze B (2008) The EU Emissions Trading Scheme: the effects of industrial production and CO2 emissions on European carbon prices. Int Econ 11:93–126

    Google Scholar 

  3. Alberola E, Chevallier J, Cheze B (2009) Emissions compliances and carbon prices under the EU ETS: a country specific analysis of industrial sectors. J Policy Model 31(3):446–462

    Article  Google Scholar 

  4. Balke NS (2000) Credit and economic activity: credit regimes and nonlinear propagation of shocks. Rev Econ Stat 82(2):344–349

    Article  Google Scholar 

  5. Bredin D, Muckley C (2011) An emerging equilibrium in the EU emissions trading scheme. Energy Econ 33:353–363

    Article  Google Scholar 

  6. Bunn DW, Fezzi C (2009) Structural interactions of European carbon trading and energy prices. J Energy Mark 2(4):53–69

    Google Scholar 

  7. Chevallier J (2009) Carbon futures and macroeconomic risk factors: a view from the EU ETS. Energy Econ 31(4):614–625

    Article  Google Scholar 

  8. Chevallier J (2011) Macroeconomics, finance, commodities: Interactions with carbon markets in a data-rich model. Econ Model 28(1–2):557–567

    Article  Google Scholar 

  9. Chevallier J (2011b) Econometric analysis of carbon markets: the European Union Emissions trading scheme and the clean development mechanism. Springer

    Google Scholar 

  10. Chevallier J (2011) Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR model. Econ Model 28(6):2634–2656

    Article  Google Scholar 

  11. Chevallier J (2011) A model of carbon price Interactions with macroeconomic and energy dynamics. Energy Econ 33(6):1295–1312

    Article  Google Scholar 

  12. Chevallier J (2011) The impact of nonlinearities for carbon markets analyses. Int Econ 126–127:131–150

    Article  Google Scholar 

  13. Christiansen A, Arvanitakis A, Tangen K, Hasselknippe H (2005) Price determinants in the EU emissions trading scheme. Clim Policy 5:15–30

    Article  Google Scholar 

  14. Creti A, Jouvet PA, Mignon V (2012) Carbon price drivers: Phase I versus Phase II equilibrium ? Energy Econ 34:327–334

    Article  Google Scholar 

  15. Cryer JD, Chan KS (2008) Time series analysis with applications in R. Springer Texts in Statistics, 2nd edn. Springer, New York

    Google Scholar 

  16. Ellerman AD, Convery FJ, De Perthuis C (2010) Pricing carbon: the European Union emissions trading scheme. Cambridge University Press, Cambridge

    Google Scholar 

  17. Franses PH, van Dijk D (2003) Non-linear time series models in empirical finance, 2nd edn. Cambridge University Press, Cambridge

    Google Scholar 

  18. Hansen B (1996) Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica 64:413–430

    Article  MATH  MathSciNet  Google Scholar 

  19. Hansen B (1999) Testing for linearity. J Econ Surv 13(5):551–576

    Article  Google Scholar 

  20. HFW (2012) EU Emissions trading scheme becomes reality. Client Brief, Holman Fenwick Willan. http://www.hfw.com/__data/assets/pdf_file/0019/17713/Client-Brief-EU-Emissions-Trading-Scheme-Becomes-Reality-for-Airlines-A4-6pp-January-2012.pdf

  21. Hinterman B (2010) Allowance price drivers in the first phase of the EU ETS. J Environ Econ Manag 59:43–56

    Article  Google Scholar 

  22. Kanen, J.L.M. 2006. Carbon Trading and Pricing, Environmental Finance Publications

    Google Scholar 

  23. Lo MC, Zivot E (2001) Threshold cointegration and nonlinear adjustment to the law of one price. Macroecon Dyn 5(4):533–576

    MATH  Google Scholar 

  24. Mansanet-Bataller M, Chevallier J, Herve-Mignucci M, Alberola E (2011) EUA and sCER Phase II price drivers: unveiling the reasons for the existence of the EUA-sCER spread. Energy Policy 39(3):1056–1069

    Article  Google Scholar 

  25. Mansanet-Bataller M, Pardo A, Valor E (2007) CO2 prices, energy and weather. Energy J 28(3):73–92

    Article  Google Scholar 

  26. Pinho C, Madaleno M (2011) CO2 emission allowances and other fuel markets interactions. Environ Econ Policy Stud 13:259–281

    Article  Google Scholar 

  27. Springer U (2003) The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies. Energy Econ 25(5):527–551

    Article  Google Scholar 

  28. Tendances Carbone (2013) The EU ETS, a good example of a “zombie” public policy. Tendances Carbone 80, CDC Climat, Paris, France. http://www.cdcclimat.com/IMG//pdf/tendances_carbone_cdc_climat_research_no80_veng.pdf

  29. Teräsvirta T, Tjostheim D, Granger CWJ (2011) Modelling nonlinear economic time series: advanced texts in econometrics. Oxford University Press, Oxford

    Google Scholar 

  30. Tong H (1990) Non-linear time series: a dynamical system approach. Clarendon Press, Oxford

    MATH  Google Scholar 

Download references

Acknowledgments

For helpful comments on previous versions, I wish to thank Bruce Mizrach, Daniel Rittler, Neil R. Ericsson, Hans-Martin Krolzig, Emilie Alberola, Benoît Sévi, Anna Creti, Philipp Koenig, Fabien Roques, Benoît Leguet, Kenneth Roskelley, Alexander Kurov, Mikel Gonzalez, Ibon Galarraga, Alberto Ansuategi, Georg Zachmann, Paulina Beato, Jobst Heitzig, Jürgen Kurths, Philipp Ringler, Matthias Reeg, Antoine Mandel, Nicola Botta, Eric Smith, Doyne Farmer, Florian Landis, Robert Schmidt, Ulrike Konneke; and seminar participants at the 19th Annual Symposium of the Society for Nonlinear Dynamics and Econometrics (Washington DC), the 65th European Meeting of the Econometric Society (Oslo), the HEC Energy and Finance Chair Research Conference on “The Behavior of Carbon Prices” (Paris), the 48th Annual Meeting of the Eastern Finance Association (Boston), the BC3 Low Carbon Programme Workshop on “The Economics of Green Energy and Efficiency” (Bilbao), the PIK Workshop on “Modelling Carbon Prices—Interacting agent networks and Strategies under risk” (Potsdam).

Author information

Authors and Affiliations

  1. IPAG Business School, IPAG Lab, 184 Boulevard Saint-Germain, 75006, Paris, France

    Julien Chevallier

Authors
  1. Julien Chevallier
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Julien Chevallier .

Editor information

Editors and Affiliations

  1. University of the Basque Country, Bilbao, Spain

    Alberto Ansuategi

  2. Basque Centre for Climate Change(BC3), Bilbao, Spain

    Juan Delgado

  3. Basque Centre for Climate Change (BC3), Bilbao, Spain

    Ibon Galarraga

Rights and permissions

Reprints and permissions

Copyright information

© 2015 Springer International Publishing Switzerland

About this chapter

Cite this chapter

Chevallier, J. (2015). Understanding the Link Between Aggregated Industrial Production and the Carbon Price. In: Ansuategi, A., Delgado, J., Galarraga, I. (eds) Green Energy and Efficiency. Green Energy and Technology. Springer, Cham. https://doi.org/10.1007/978-3-319-03632-8_5

Download citation

  • DOI: https://doi.org/10.1007/978-3-319-03632-8_5

  • Published:

  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-319-03631-1

  • Online ISBN: 978-3-319-03632-8

  • eBook Packages: EnergyEnergy (R0)

Publish with us

Policies and ethics

Search

Navigation