Do Energy Prices or Macroeconomic Indicators Affect Carbon Prices?

This study investigates whether energy prices and macroeconomic indicators are determinants of the European Union Allowance (EUA) prices and how their relationships changed in phase III of the European Union Emission Trading Schema (EU ETS). A novel partial least squares (PLS) regression for open-high-low-close (OHLC) data is proposed and employed. The OHLC prices of EUA, key energy prices, and macroeconomic indicators during 2013 to 2020 are considered in the estimation models. Several important findings are derived. First, the PLS regression coefficients for 2013 and 2014 are unique based on the oscillatory non-convergence within 100 iterations. The estimation outcomes indicate that 2013 and 2014 are still in the unstable transition period from phase II to phase III of the EU ETS. Second, energy prices of Brent crude oil, gasoline, and diesel provide stronger explanatory power for EUA prices than macroeconomic indicators, including the European Industrial Development Index, STOXX 600, and STOXX 50. However, coal prices do not have an explanatory effect on EUA prices throughout the investigation period. Third, the correlation between EUA prices and macroeconomic indicators increases over time, while the interpretation degree of energy prices on EUA prices decreases. EUA increasingly shows its financial attributes in late phase III of the EU ETS. Finally, investment suggestions are provided for quota traders to hedge portfolios. The proposed PLS regression model for OHLC data is good at the full use of the intraday trading information and for dealing with outliers in EUA prices and multicollinearity among its explanatory variables