This study uses an econometric model with daily data to evaluate the relative importance of the four main determinants of the price of emission allowances traded in the European Union: the economic cycle; the emission intensity of industrial activities; the supply of allowances; and financial factors, such as risk aversion, speculative activity and the liquidity needs of market participants.
The supply of emission allowances, both current and expected, and financial factors are the main determinants of the price volatility of the allowances. The economic cycle and the intensity of industrial emissions play a less significant role, as they are driven by lower frequency changes which cannot explain the high daily volatility of allowance prices.
