Testing the Emissions Reduction Effect of Carbon Pricing: A Predictive Analysis of the Role of Speculation

Abstract

We employ both ex-post and ex-ante approaches to determine the role of speculation in the emissions reduction effect of carbon pricing and its forecasting power in the predictability of climate change. We use several verifiable econometric approaches to select the Feasible Quasi Generalised Least Squares (FQGLS) as the best estimator for addressing some of the biases in climate change predictability. We demonstrate that a predictive model combining the complementing dynamics of carbon pricing forecasts climate change more accurately. We demonstrate the robustness of our findings for both in-sample and out-of-sample forecasts and across different forecast horizons.