A Study Of Carbon Price Determinants And Risk Measurement Of EU ETS

The Fourth Assessment Report of the UN Intergovernmental Panel on Climate Change(IPCC) provides convincedevidences about that he carbon dioxide produced by human activity is the main reason causing global warming.In order to reduce carbon emissions,EUestablished the world’s largest carbon emissions trading system based on“Coase theory”,which is currently the most effective means of addressing climate issues. Within the EU Emissions Trading Scheme(EU ETS),carbon emission rights can be traded as a commodity, which could produce smallest marginal abatement cost to achieve the emission reduction. Therefore, many experts and scholars threw themselves into the research of carbon market. The carbon price is the most important indicatorof carbon market, knowing whose determinants will be helpful for controllingitsfluctuations, and then the risk of carbon market can be reduced.Therefore, the research ofrisk measurement and corresponding risk management meansare needed, so thatthe market participants andsupervisor are able to evaluatethe risk of carbon market morereasonably.This thesisstudies the carbon price and its determinants and givescorresponding countermeasures. The content of this thesis can be listed as follows:(A) Based on Markov-Switching Vector Auto-Regression model(MSVAR), the non-linear effect thatmacroeconomics, financial markets and energy markets impact on carbon price is examined. The empirical result shows that the sample periodof carbon market appearsfour significant regimes: the normal market regime, the abnormal market regime,the transitional market regime and the crisis market regime. The transition regime mainly emerges at the end of the first phase of EU ETS, whereas the major crisis market regime period isdruing the global financial crisis. Due to the unique trading mechanism and economic environment, under these two regimes, EUA spot price shows unusualrelationship withmacroeconomics, financial market andenergy market: being insignificant to all the variablesunder the transition regime; declining to an extremely low level within crisis market regime.(B) As to the relationship between carbon market and energy makert, a power enterprises equilibrium model consideringdifferentemissions levels of common used energy is constructed. Based onthe Cointegration model with structural changes, Granger causality test and DCC-MVGARCH model, the long-term equilibrium and dynamic conditional correlationrelationshipbetween carbon marketsand energy market are analyzed. The cointegration modelwith structural changesdivides the fullsample period into four periods, namely normal period, crisis period, recovery period and transitional period through.Under deferent period, the Brent crude oil price, coal price and natural gas price show different long-run equilibrium relationshipwith carbon price.Thedynamic conditional correlation coefficients between carbon market and the energy market are always positive, however,DCC-MVGARCH modelshows that Brent crude oil price has no direct influenceon carbon price, butthrough natural gas market.(C) This thesisalso builds a vector spacemeasurement that reflectsthe changes of EU carbon market comprehensively. The empirical result shows that,the return series of EU ETS have a significant character of volatility clustering and fat tailforboth spot price and futures price.The volatility of carbon price also shows asymmetry and leverage.Badnews hasgreater impact to carbon market than good news, andthe risk of spot market is significantly higher than futures market.(D) Based on the risk measures of carbon market, the market participants’ behavior andoptimalasset allocation strategyto hedge the risk in spot and futurecarbon marketisresearched.According to Markowitz portfolio theory,in the condition of minimum risk portfolio,the market participantsshould hold more carbon spot than carbon future formost of the periodin the two phases of the EU ETS.