Inderscience Publishers

An empirical study on the interaction between EUA futures, coal, natural gas and electricity

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This paper uses a Vector Error Correction Model (VECM), a method to estimate the adjustment speed of variables toward their long–run relationship in the short run, to investigate the dynamic relationship between the prices of EUA, coal, natural gas and electricity futures. It finds that there is a long–run equilibrium relationship between them. Short–run relationships between them are also revealed by impulse response analysis. The price of electricity futures has a positive short–run response to EUA futures price shocks. It also has a positive short–run response to the price of fossil fuel futures. Price shocks in EUA futures have a significant impact on fossil fuel prices, but fossil fuel prices have a small impact on EUA futures. The effect of price shocks in EUA and coal futures on the price of peak load electricity futures is smaller than that of the price of base load electricity futures.

Keywords: EUA futures, VECM, vector error correction model, impulse response, futures market, price shocks, coal prices, natural gas prices, electricity prices, equilibrium relationship, fossil fuel futures, EU emission allowances, carbon emissions, EU Emissions Trading Scheme, greenhouse gases, GHG emissions, European Union

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