The European Union Emission Trading Scheme and Its Drivers

Uludağ A., Tunç G. İ.

Ekonomik Yaklaşım, vol.31, no.116, pp.35-67, 2020 (Peer-Reviewed Journal)

  • Publication Type: Article / Article
  • Volume: 31 Issue: 116
  • Publication Date: 2020
  • Doi Number: 10.5455/ey.17012
  • Journal Name: Ekonomik Yaklaşım
  • Journal Indexes: EconLit
  • Page Numbers: pp.35-67
  • Middle East Technical University Affiliated: Yes


This study analyzes the interaction of carbon prices in the European Union Emissions Trading Scheme (EU ETS) with other possible determinants. In the study, the relationship of carbon prices with the indicative variables related to industrial production, economic expectations, weather conditions and fossil fuels has been discussed within the framework of ARDL (autoregressive distributed lag) co-integration method. Both the short-term and long-term relationships of this interaction have been put forward. In addition, the causality relationship among the variables is presented by adopting the Toda-Yamamoto Granger Non-Causality test approach. The most important feature that differentiates this study from its peers is the inclusion of the effects of the Paris Agreement and following two years into the analysis. In this way, all the building blocks of the international climate change regimes can be handled together and an adequate timeframe to see the effects of regime changes can be captured clearly. From the empirical analysis it is found that short-run and long-run determinants of emission allowance prices differ. In the short-run economic sentiment and itself affect the emission allowance prices negatively while one month lagged heating degree day affect them positively. In the long-run coal price and industrial production index affect the prices positively and natural gas price affects emission allowance prices in negative direction.