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How Interdependent are Energy and Carbon Markets? Evidence from a Quantile-on-Quantile Regression Approach

Duan, Kun and Ren, Xiaohang and Shi, Yukun and Mishra, Tapas and Yan, Cheng (2021) 'How Interdependent are Energy and Carbon Markets? Evidence from a Quantile-on-Quantile Regression Approach.' Energy Economics. ISSN 0140-9883 (In Press)

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Abstract

We uncover the marginal impacts of energy prices on carbon price variations across carbon-energy price distributions in Phase III of the European Union Emission Trading Scheme (EU ETS). Applying a novel Quantile-on-Quantile (QQ) regression and the causality-in-quantiles approach, our empirical results demonstrate asymmetric and negative impacts of energy prices on carbon prices. The impacts are stronger at lower carbon quantiles and relatively smaller at higher quantiles (in absolute terms). Concerning different energy sources, the impacts of both oil and coal prices show a quasi-monotonic increase along with a rise in carbon quantiles; the absolute values of their impacts are much greater than that of the gas price impacts, depicting a relatively flat pattern. The results are consistent with our theoretical explanations which identify the two effect-transmission channels from energy to carbon prices, viz. the aggregated carbon demand effect and the fuel-switching effect. Thanks to the differences in energy sources and variability over their price distributions, the observed differential in carbon price-response is an indication of non-unique carbon market dynamics, the efficient management of which would require differentiated policy interventions. Robustness checks further confirm the accuracy of our conclusions.

Item Type: Article
Uncontrolled Keywords: Carbon futures prices, Energy futures prices, EU ETS, Quantile-on-Quantile, Causality-in-quantiles
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 22 Jan 2021 16:33
Last Modified: 22 Jan 2021 17:15
URI: http://repository.essex.ac.uk/id/eprint/29592

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