Carbon trading thickness and market efficiency

Citation

Montagnoli A & de Vries F (2010) Carbon trading thickness and market efficiency. Energy Economics, 32 (6), pp. 1331-1336. http://www.sciencedirect.com/science/journal/01409883; https://doi.org/10.1016/j.eneco.2010.04.001

Abstract
This note tests for the efficient market hypothesis (EMH) in the market for CO2 emission allowances in Phase I and Phase II of the European Union Emissions Trading Scheme (EU ETS). As usually is the case in emerging and non-competitive markets such as the EU ETS, trading often not occurs on a frequent basis. This has adverse implications for both the gains from permit trade as well as biases the EMH tests. Variance ratio tests are employed to adjust for the thin trading effect. The results indicate that Phase I –the trial and learning period– was inefficient, whereas the first period under Phase II shows signs of restoring market efficiency.

Keywords
carbon trading; efficient market hypothesis; thin trading; variance ratio tests; EU ETS; Pollution Environmental aspects; Environmental impact charges Great Britain; Taxation Great Britain Environmental aspects

Journal
Energy Economics: Volume 32, Issue 6