Long-Term Carbon Credit Dynamics on the EU ETS

This thesis studies the long-term price dynamics of the EU Emission Allowances (EUAs) and Certified Emission Reductions (CERs), the two carbon credits traded on the EU Emissions Trading Scheme (EU ETS). I use energy, economic, and climate variables and analyse their relationship with the carbon prices in the period April 2009 until December 2014. This thesis models Vector Error Correction Models (VECMs) for the carbon prices and finds that good economic periods, indicated by a high oil price and industrial production, result in an increase of both carbon prices. These promising results show that carbon prices can be meaningfully modelled and have a clear relation-ship to market securities. VECMs are also shown to perform much better than Vector Autoregressive (VAR) models for the carbon returns. The role of the carbon prices in a VECM diminishes as the number of variables included in the VECM increases. This indicates that although equilibria with carbon prices are present in the market, their effect is easily overshadowed by the relationships between more important variables. Furthermore, this thesis in-vestigates possible structural breaks in the dataset and copes with these by modelling sub-periods and including dummy variables.