A1846
Title: EU ETS market expectations and rational bubbles
Authors: Christoph Wegener - Leuphana University Lueneburg (Germany) [presenting]
Tony Klein - Queen's University Belfast (United Kingdom)
Robinson Kruse-Becher - FernUniversität in Hagen (Germany)
Abstract: The European Emissions Trading Scheme (EU ETS) was implemented as a fundamental climate protection instrument, intended to mitigate the negative externalities of CO2 emissions in Europe. However, concerns have been raised regarding the surge in prices during the third trading period (2013-2020), prompting speculation about the potential emergence of a price bubble. Consequently, a speculative bubble would indicate a compromised efficiency within the EU ETS and this could influence policy decisions regarding the design of CO2 emission trading schemes. It is argued that tests for speculative bubbles in the EU ETS, relying on switching costs, are limited to scenarios of market certainty. Given the evolving CO2 emission reduction measures, assuming market actors act with certainty seems implausible. Moreover, defining fundamental value through switching costs lacks a singular approach, leading to inconclusive findings. The aim is to explore speculative bubbles in the EU ETS during its third trading period, incorporating market expectations as a more robust alternative to switching cost-based methods. The findings reveal (i) distinct explosive episodes in EU ETS prices, (ii) coincident timing of explosive price behavior and price expectations, suggesting the absence of a financial bubble in the EU ETS and (iii) that the EU ETS has not been integrated into energy markets prior to explosive episodes.
