An Analysis of Decision Factors on the Price of South Korea’s Certified Emission Reductions in Use of Vector Error Correction Model

Abstract

This study analyzes factors affecting the price of South Korea’s Certified Emission Reduction (CER) using statistical methods. CER refers to the transaction price for the amount of carbon emitted. Analysis of results found a co-integration relationship among the price of South Korea’s CER, oil price (WTI), and South Korea’s maximum electric power demand, which means that there is a long-term relationship among the three variables. Based on this result, VECM (vector error correction model) analysis, impulse response function, and variance decomposition were performed. As the oil price (WTI) increases, the demand for gas in power generation in Korea declines while the demand for coal increases. This leads to increased greenhouse gas (GHG; e.g., CO2) emissions and increased price of South Korea’s CERs. In addition, rising oil prices (WTI) cause a decline in demand for oil products such as kerosene, which results in an increase in South Korea’s maximum power demand.