Journal of Risk & Control

Analysis of the Characteristics of Price Volatility in Carbon Emission Rights Market Trading

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• Abstract

   

  Market-driven policies to address the externality of climate change include carbon taxes and emissions trading systems. The relationship between these carbon pricing instruments' designs and variations in the business cycle is the main topic of this essay. One pressing policy issue is specifically whether and how these tools ought to react to business cycles. In order to respond, the paper compiles pertinent theoretical and empirical findings from scholarly works. It concludes that by including responsiveness into the architecture of carbon pricing instruments, the regulatory burden can be lessened over time and distributed more fairly. This can be accomplished specifically by easing the cap during economic expansions and tightening it during recessions in contrast to a fixed cap emissions trading scheme. In a similar vein, a carbon tax regime that is less responsive to cycles and levies a higher tax during expansions and a lower tax during recessions is probably going to enhance welfare. It is difficult to implement a process that makes carbon pricing devices in the real world responsive. The paper focuses on the major groups of mechanisms that have been studied in the literature, giving a general overview of the trade-offs involved. When selecting a responsiveness-inducing mechanism, it is important to take into account the unique features of the nation, including its institutional background, any pertinent political economy issues, and the peculiarities of variations in its GDP and emissions.

   

  JEL classification numbers: G12, G17, G18.

  Keywords: Carbon emission trading market, GARCH model, VaR.