Impact of Changes in Membership on Prices of a Unified Carbon Market: Case Study of the European Union Emissions Trading System

• Published in: Sustainability
• Main Authors: Yue Xu, Dayu Zhai
• Format: Article in Journal/Newspaper
• Language: English
• Published: MDPI AG 2022
• Subjects: unified carbon market; carbon price; EU member states; EU ETS; event study; Environmental effects of industries and plants; TD194-195; Renewable energy sources; TJ807-830; Environmental sciences; GE1-350; Iceland
• Online Access: https://doi.org/10.3390/su142113806; https://doaj.org/article/5ae8ad4ad5f9438f811ed1c85638a5dd

Using the event study methodology, the paper studies the effects of 22 key events in countries’ process of entering and exiting the European Union on returns of European Union Allowance (EUA) future prices in the EU Emissions Trading System (EU ETS). The events include 17 entry events concerning the signing of relevant agreements, becoming a candidate or potential candidate country, the process of a negotiation and formally entering the EU, and five exit events including the process of Brexit and the suspension of Iceland. The results show that two entry events involving Albania and Ukraine, respectively, have a significant positive impact, and five entry events have a significant negative impact. Among the exit events, the announcement of the Brexit referendum results causes significant negative market reaction. Most events regarding small carbon emitters entering the EU lead to negative cumulative abnormal returns (CAR) of EUA prices, and a significant negative correlation between the countries’ annual average carbon emissions and CAR is found, while the change of national allocation plans does not affect the market reaction notably. In the process of establishing a unified carbon market, regulators should carry out appropriate policy arrangements of emission allowances allocation when new members join, in order to guide market expectations and enhance market stability.