Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2016:10: Explaining the Interplay of Three Markets: Green Certificates, Carbon Emissions and Electricity

Sandra Schusser () and Jurate Jaraite ()
Additional contact information
Sandra Schusser: CERE and the Department of Forest Economics, SLU, Postal: Department of Forest Economics, Swedish University of Agricultural Sciences, Umeå, Sweden
Jurate Jaraite: CERE and the Department of Economics, Umeå University, Postal: School of Business and Economics, Umeå University,, Umeå, Sweden

Abstract: The European Union's Emissions Trading System (EU ETS) and the Swedish-Norwegian Tradable Green Certicate System (Swedish-Norwegian TGC system) are two market-based instruments that have the overlapping goal to mitigate greenhouse gas (GHG) emissions by shifting economies to cleaner energy sources. Understanding the price signals and interactions of these two newly created markets is essential for all decisions makers, regulators and direct market participants, who aim to reach the predefined environmental policy goals in the most efficient manner. The interaction between these policy instruments has been widely examined from the theoretical perspective. This research contributes to the literature by empirically examining the interplay between the prices of three markets: (1) the price of tradable green certificates in the Swedish-Norwegian TGC system, (2) the price of carbon in the EU ETS and (3) the price of electricity in Nord Pool. We use a multivariate vector-autoregression (VAR) approach to take into account the endogenous relationships between these prices. To date, our empirical results do not support the theoretical considerations that the impacts of carbon price on green certicate prices and on renewable electricity production are negative. Contrary, we find that, to date, increases in carbon prices positively affect green certificate prices at least in the short-run.

Keywords: Renewable energy; Electricity; Green certificates; Emissions trading; EU ETS; interactions; tradable green certificates; Sweden; VAR model

JEL-codes: Q28; Q41; Q42; Q48

29 pages, June 1, 2016

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