Does weather, or energy prices, affect carbon prices?

This study investigates the extent that key energy prices (coal, gas, oil and electricity) and weather explain car -bon prices, a key feature of the European Union Emissions Trading Scheme (EU ETS), and whether this relation-ship changed since full auctioning came into effect in 2013. Energy prices were found to impact the carbon price in phase III of the EU ETS. However, modelling based solely on energy prices explained only 12% of carbon price variation. Weather variables did not affect the carbon price except for unanticipated temperature changes. These results indicate that it is not the level of temperature that impacts the carbon price, rather it is unanticipated changes in temperature that matter. Given that climate change is associated with increased variance in temper-ature, this result is consistent with climate change resulting in greater carbon price volatility and higher hedging costs. (c) 2020 Elsevier B.V. All rights reserved. This study investigates the extent that key energy prices (coal, gas, oil and electricity) and weather explain carbon prices, a key feature of the European Union Emissions Trading Scheme (EU ETS), and whether this relationship changed since full auctioning came into effect in 2013. Energy prices were found to impact the carbon price in phase III of the EU ETS. However, modelling based solely on energy prices explained only 12% of carbon price variation. Weather variables did not affect the carbon price except for unanticipated temperature changes. These results indicate that it is not the level of temperature that impacts the carbon price, rather it is unanticipated changes in temperature that matter. Given that climate change is associated with increased variance in temperature, this result is consistent with climate change resulting in greater carbon price volatility and higher hedging costs.

Automated summary

This study found that energy prices impact carbon prices, but only explain 12% of the variation. Weather variables have little effect on carbon prices, except for unexpected temperature changes. This implies that unexpected temperature changes, rather than the overall level of temperature, impact carbon prices, suggesting that climate change may lead to increased carbon price volatility and higher hedging costs.