China Policy Journal Volume 1, Number 1, Fall 2018 | Page 37

China Policy Journal
(2008) explored the drivers of EUA spot
price in two sub-periods during January
2005–April 2007 (before and after
the “compliance break” in 2016), and
found that oil price positively affected
the EUA price in both sub-periods.
However, some other studies reported a
negative relationship between oil price
and CO 2
emission allowance price when
the substitution effect was not significant.
Hammoudeh, Nguyen, and Sousa
(2014a) found that when CO 2
emission
allowance price was at a high level, oil
prices had a substantial negative effect
on CO 2
emission allowance price. They
explained that the result might be (1)
because when CO 2
emission allowance
price was high, higher oil price might
lead to a substantial drop in all energy
consumption and the associated emissions,
without encouraging the substitution
of coal for oil, or (2) because
higher oil price might raise all energy
prices and encourage the use of cleaner
energy resources.
Some studies revealed a negative
relation between coal price and the CO 2
emission allowance price, which is consistent
with the substitution effect theory.
Hammoudeh, Nguyen, and Sousa
(2014a) suggested that in the context of
US during 2006–2013, coal price had a
negative impact on CO 2
emission allowance
price, as a rise in coal price could
arrest coal-associated pollution. Hammoudeh
et al. (2015) further stated that
coal price had a negative but asymmetric
impact on the CO 2
emission allowance
price in the short term. Compared
to a price increase, a price decrease of
coal had a more significant impact.
Literature has also examined
whether the natural gas price affects the
price of the CO 2
emission allowance.
Alberola, Chevallier, and Chèze (2008)
found that the natural gas price positively
impacted EUA spot price while
the coal price negatively impacted EUA
spot price during January 2005–April
2007. Alberola, Chevallier, and Chèze
(2008) also included the switch price
between natural gas and coal in the
analysis, but there seemed to be a multicollinearity
problem among coal price,
gas price, and the switch price. Tan and
Wang (2017b) summarized that during
the three phases of EU ETS, the relationships
between EUA price and energy
prices vary from one phase to another.
It is reasonable as the supply and
demand curves of energy sources were
changing during the three phases. Same
could be said about the supply and demand
of emission allowances.
Some studies examined the impact
of macroeconomic indicators, such
as aggregated industrial production,
stock index, economy crisis dummy
and so on. The macroeconomic indicators
can influence CO 2
emission allowance
price either through affecting the
expectation of economic growth and
the future emission allowance demand
or through affecting the changes of energy
price (Tan and Wang 2017b). However,
only a few of the studies showed
that the impact of macroeconomic indicators
is significant (Chevallier 2011;
Koch et al. 2014). Literature also found
structural breaks of CO 2
emission allowance
price series due to institutional
decisions or events. For instance, there
was often a compliance break in year
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