Extracting a Shadow Carbon Price Using a Non-Stationary Dynamic Factor Analysis

This paper investigates whether a common factor, which can be interpreted as a shadow carbon price, can be extracted from price series in 13 major national and subnational emission trading systems (ETSs). For this purpose, we estimate a dynamic factor model accounting for information incompleteness and non-stationarity in carbon price series. Our results indicate that the extracted common factor (i) exhibits very low values varying between US$ 0.94 and US$ 13.64 per ton of emitted carbon dioxide equivalent, and (ii) does not cointegrate with the market prices and consequently the ETSs do not converge