What determines the price of carbon? New evidence from Phase III and IV of the EU ETS

Dittmann, B., Lauter, T., Prokopczuk, M. and Sibbertsen, P. (2025) What determines the price of carbon? New evidence from Phase III and IV of the EU ETS. Journal of Climate Finance, 12. 100070. ISSN 2949-7280 doi: 10.1016/j.jclimf.2025.100070

Abstract/Summary

In this paper, we provide new evidence on the determinants of EU emission allowance prices by analyzing the most recent time period, i.e. phases III and IV. We consider energy (oil, natural gas, coal) and electricity prices as well as profit spreads of marginal power generation (clean dark spread, clean spark spread) using various modeling approaches. We find that none of the approaches that have been proposed in the early literature on carbon pricing is suitable to explain the allowance price in more recent samples. Among the variables, crude oil appears to be the most important market fundamental, as it explains the largest share of variance on its own. However, the explanatory power of all variables diminishes compared to what has been documented before. Previous literature shows that the market fundamentals are able to explain about 30% of the variation of EU emission allowances in phase I, while we show that the explanatory power drops to below 5% in the more recent trading phases III and IV.We conjecture that as more and more industries fall under the regulation, the economic mechanics have fundamentally changed.

Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/130854
Identification Number/DOI	10.1016/j.jclimf.2025.100070
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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