Forecasting EU Allowance Price Using Transactions of Central Entities

Sotirios Dimos, Eleni Evangelatou, Dimitris Fotakis, Andreas Mantis, Angeliki Mathioudaki

School of Electrical and Computer Engineering, National Technical University of Athens, Iroon Polytechniou 9, 15780 Athens Greece.

Abstract: European Union Emission Trading System (EU ETS) can be analyzed as a transaction network. Under the rules of ETS, firms must hold enough allowances to cover for their annual emissions. Excess allowances may be traded or banked for future use. The allowance price is considered as an indication of how well the policy meets its objectives. We aim for a better understanding of the structure of the network and of the way the market dynamics affect the EUA price. Our findings indicate that there exists a small subset of nodes which emerges as core transactors and accounts to roughly 1.8% of the entire network participants. We call it All Time Almost Dominating Set, (ATADOM). Aiming to quantify its power, we provide a Vector AutoRegressive (VAR) model to forecast the EUA price. By using trading quantities restricted to ATADOM, along with significant price determinants from the literature, we find that it is possible to explain and to forecast EUA price by just tracking the behavior of the ATADOM set within EU ETS. Our work can be the basis of a compact evaluation tool to one of the most prominent environmental policies, the EU ETS.

Keywords: EU ETS, Trading Network, Core-Periphery, Dominating Set, EUA Price Forecasting, Vector AutoRegression.

Pages: 187 – 209 | Full PDF Paper