Study On Market Efficiency Of International Carbon Trading Market

Under the impetus of international climate negotiations, the international carbon emissiontrading markets are being established based on the property right theory of Coase, where themarket mechanisms are being improved and the market scale are being expanded. Marketefficiency has become the core issue. By theoretical and empirical analysis, this paper studies onthe European Union Emissions Trading Scheme (EU ETS), which is the largest and the mostsuccessful carbon market in the world so far. Based on the “Fair Games” model, an EfficientMarket Model of the international carbon trading markets is set up, which indicates that if carbonprices follow the martingale process, the carbon trading markets would be efficient. Efficientmarkets hypothesis has three market conditions, including rational investors, no informationcosts and no transaction costs. Violating them could lead to market inefficiency. Given this, theconditions of EU-ETS are examined by the cobweb model, the static game model of incompleteinformation and the transaction costs theory. The results show that international carbon tradingmarkets could not satisfied, implying that they are not strong-form markets or semi-strong-formmarkets. To further analyze, this paper researches the weak-form efficiency of EU-ETS byempirical tests. The EUA spot prices are chosen from ECX, covering the period from24thJune,2005to31stDecember,2013, divided into three phases according to the EUA allocation. Thispaper introduces the traditional Variance Ratio (VR) test, Wright’s non-parametric VR test,Chow Denning’s multiple VR test and Joint Wright’s multiple VR test. After selected, the resultscome out that the market efficiency of EU-ETS has phased feature, implying that the first and thethird phases are non weak-form efficient while the second phase is weak-form efficient. Carbontrading market efficiency is related to not only the market mechanism, but stability of policies aswell. Finally, political suggestions are put forward aiming at solving problems affecting marketefficiency.