Measuring the Impact of Carbon Allowance Trading on Energy Prices

Abstract

We investigate time series linkages between the EU carbon allowance price and the prices of coal, oil, natural gas and electricity. We find no long-run relationship between the variables, but instead some short-run linkages. Using Granger causality tests and generalised impulse-response analysis we find evidence of links between i) carbon and oil, ii) carbon and natural gas, and iii) electricity and carbon, as well as other links between the energy variables. The finding of no long-term relationship can be attributed either to the relative immaturity and imperfections of the carbon market, or the possibility that while carbon trading may result in a more efficient use of energy resources, it does not directly impact fossil fuel prices.