A0288
Title: The puzzle of carbon allowance spread
Authors: Michele Azzone - Politecnico di Milano (Italy) [presenting]
Roberto Baviera - Politecnico di Milano (Italy)
Pietro Manzoni - Politecnico di Milano (Italy)
Abstract: A growing number of contributions in the literature have identified a puzzle in the European carbon allowance (EUA) market. Specifically, a persistent cost-of-carry spread (C-spread) over the risk-free rate has been observed. This is the first explanation of the anomalous C-spread with the credit spread of the corporates involved in the emission trading scheme. Statistical evidence that the C-spread is cointegrated with both this credit spread and the risk-free interest rate is obtained. This finding has a relevant policy implication: The most effective solution to solve the market anomaly is to include the EUA in the list of European Central Bank-eligible collateral for refinancing operations. This change in the ECB monetary policy operations would greatly benefit the carbon market and the EU green transition.
