Recognizing the seriousness of global warning, international society is trying to reduce greenhouse gas emission through the United Nations Framework Convention on Climate Change. In particular, the establishment of the Kyoto Protocol has kindled inte...
Recognizing the seriousness of global warning, international society is trying to reduce greenhouse gas emission through the United Nations Framework Convention on Climate Change. In particular, the establishment of the Kyoto Protocol has kindled interest on the emission trading scheme. Following the current movement, Korea is also planning to implement the emissions trading scheme in 2015. Currently, the largest market is the European market, and the price of EUA(European Union Allowances) has important effects on the countries and corporate entities in Europe, as well as on the offshore countries. This study aims to analyze primary factors influencing the price of EUA by reviewing the mechanism of the emission trading scheme in the European market. Energy factors(coal, oil and natural gas), price of electricity, economic variables(European Industrial Production Index) and climate factors(Temperature, Precipitation), are used as the primary variables affecting the prices of EUA. Data analysis included estimating Granger causality, impulse response function, and forecast error variance decomposition based on monthly data from December 2008 to November 2014. The empirical results are summarized as follows: First, VECM estimation results indicate that coal prices, gas indices, European Production Industrial Production indices, Temperature, CER are negative for EUA indices. Brent indices, future price of electricity, Precipitation are positive for EUA. Second, The findings of the Granger Causality test indicate that EUA future indices and CER future indices sequence Granger causality in both directions.