Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method

Huang, Wenyang and Wang, Yizhi 2024. Identifying price bubbles in global carbon markets: Evidence from the SADF test, GSADF test and LPPLS method. Energy Economics 134 , 107626. 10.1016/j.eneco.2024.107626 Item availability restricted.

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Abstract

Amid growing climate concerns, Emissions Trading Schemes (ETS) serve as key mechanisms for reducing greenhouse gas emissions through market forces. This study delves into the phenomenon of price bubbles within six major ETSs globally: the European Union Emissions Trading Scheme (EU ETS), the New Zealand Emissions Trading Scheme (NZ ETS), the California-Québec Emissions Trading Scheme (CQ ETS), the South Korea Emissions Trading Schemes (K-ETS), the China Emissions Trading Scheme (C-ETS), and the United Kingdom Emissions Trading Schemes (UK ETS). Employing the sup augmented Dickey-Fuller (SADF) test, generalized sup ADF (GSADF) test, and log-periodic power law singularity (LPPLS) model, our analysis aims to uncover the dynamics and implications of these bubbles. Our findings reveal varied patterns of price bubbles across the schemes, with the EU ETS showing the highest frequency and the NZ ETS exhibiting the longest durations. The period of 2021 and 2022 marked a significant increase in bubble occurrences across all ETSs, suggesting the influence of post-COVID-19 economic recovery and geopolitical tensions on market stability. These bubbles are attributed to factors including carbon market policies, macroeconomic conditions, energy price fluctuations, and market uncertainties. The study offers valuable insights for compliance firms, policymakers, and investors on navigating carbon market volatility. Understanding bubble dynamics can aid in formulating more effective emission reduction strategies, carbon pricing policies, and investment decisions. This research underscores the importance of integrating monetary policy considerations with environmental objectives within ETS frameworks, paving the way for future research on predictive bubble detection and the development of robust carbon market regulations.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	0140-9883
Date of First Compliant Deposit:	31 May 2024
Date of Acceptance:	9 May 2024
Last Modified:	10 Nov 2024 05:30
URI:	https://orca.cardiff.ac.uk/id/eprint/169005

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