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Price and Network Dynamics in the European Carbon Market

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Working paper
Author/s: 
Andreas Karpf, Antoine Mandel, Stefano Battiston
Issue number: 
2017.10
Series: 
CES Documents de travail
Publisher: 
Centre d'Economie de la Sorbonne
Year: 
2017
This paper presents an analysis of the European Emission Trading System as a transaction network. It is shown that, given the lack of a centralized market place, industrial actors had to resort to local connections and financial intermediaries to participate in the market. This gave rise to a hierarchical structure in the transaction network. To empirically relate networks statistics to market outcomes a PLS-PM modeling technique is introduced. It is shown that the asymmetries in the network induced market inefficiencies (e.g. increased bid-ask spread). Albeit the efficiency of the market has improved from the beginning of Phase II, the asymmetry persists, imposing unnecessary additional costs on agents and reducing the effectiveness of the market as a mitigation instrument.
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