Volatility spillover between electricity, carbon emissions and green certificates: A Nordic case study

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: This study investigates volatility spillover between the prices of electricity at Nord Pool, carbon emission allowances in the EU Emissions Trading System (EU ETS) and tradable green certificates (TGC) in the Swedish-Norwegian TGC market. ETS and TGC schemes are market-based policies with the overlapping goals of mitigating greenhouse gas emissions and stimulating sustainable energy investments. A proper understanding of the interactions between these markets is essential for managers of policy and energy technology portfolios. Using a VAR-BEKK model and the Volatility Impulse Response Function (VIRF) methodology, evidence of spillover between all three markets is found. The strongest and most persistent volatility transmission occurs between the prices of electricity and carbon. The VIRF simulations further show that large shocks to electricity and carbon prices increase expected certificate price volatility. These results highlight the importance of considering spillover effects when coordinating market-based climate policies in order to minimise the risks of investing in sustainable energy projects.

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