Market and Trade Network Analysis of EU Emission Trading System

The European Union Emission Trading System (EU ETS) is the world’s largest cap-and-trade system. The observed price instabilities and the oversupply of the allowances are two characteristics that affect the objectives and the efficiency of the policy. In this article we investigate the impact of storing allowances, i.e. banking, in terms of the price level, transaction volume and importance in the underlying trading network. To that end, we used data from the EU Transaction Log (EUTL) until 2014 in conjunction with a variety of important price determinants. Using a sectoral analysis through the years, we observe that the regulated actors participate increasingly in the transaction network in contrast with the pure financial actors that exhibit an opposite trend. Furthermore, we quantify the relationship between banking and the carbon price by applying multiple regression on the price considering many possible price determinants both financial and EU ETS systemic in nature. We claim that after considering these factors, banking is a notable price determinant. Finally, we examined the network of transactions of allowances with respect to the role of financial and regulated nodes. We identified the intermediary role of financial nodes from their significance in the network structure.