<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>The rapid increases of European Union Allowance (EUA) prices and very high market volatility, resulting mainly from the growing role of speculative entities, can contribute to forming a price bubble. This may cause the market instability and could have a implications on planning future reduction investments by European Union Emissions Trading Scheme (EU ETS) participants. That is why they need some kind of ‘safety valve’, an effective EU ETS instrument, which can be triggered when the situation requires it.</p>
<p>The purpose of this paper is to examine whether the current legislative rules of the EU ETS protect against sudden EUA price fluctuation and the risk of formation of a price bubble. This paper tries to assess the potential EUA price bubble and to review of existing instruments within the EU ETS, analysing their efficiency using different assumptions and identify channels of possible other market instruments to efficiently prevent the carbon market instability caused by rising EUA prices and market speculation. We argue that the European Commission (EC) does not currently have an appropriate market instrument to respond to the EUA price fluctuation. Moreover, there are some legislative loopholes in the system, which may encourage market speculators to influence EUA prices, and there is need to introduce better market safeguards.</p>
</abstract>

The rapid increases of European Union Allowance (EUA) prices and very high market volatility, resulting mainly from the growing role of speculative entities, can contribute to forming a price bubble. This may cause the market instability and could have a implications on planning future reduction investments by European Union Emissions Trading Scheme (EU ETS) participants. That is why they need some kind of ‘safety valve’, an effective EU ETS instrument, which can be triggered when the situation requires it.
The purpose of this paper is to examine whether the current legislative rules of the EU ETS protect against sudden EUA price fluctuation and the risk of formation of a price bubble. This paper tries to assess the potential EUA price bubble and to review of existing instruments within the EU ETS, analysing their efficiency using different assumptions and identify channels of possible other market instruments to efficiently prevent the carbon market instability caused by rising EUA prices and market speculation. We argue that the European Commission (EC) does not currently have an appropriate market instrument to respond to the EUA price fluctuation. Moreover, there are some legislative loopholes in the system, which may encourage market speculators to influence EUA prices, and there is need to introduce better market safeguards.

Reflections on the Mechanisms to Protect Against Formation of Price Bubble in the EU ETS Market

Environmental Protection and Natural Resources

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

The rapid increases of European Union Allowance (EUA) prices and very high market volatility, resulting mainly from the growing role of speculative entities,...

Reflections on the Mechanisms to Protect Against Formation of Price Bubble in the EU ETS Market

Published Online: Jun 30, 2021

Page range: 8 - 17

DOI: https://doi.org/10.2478/oszn-2021-0005

Keywords
EU ETS, EUA price, MSR, price bubble, market manipulation, speculators, price volatility, cap tightening

© 2021 Robert Jeszke et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Reflections on the Mechanisms to Protect Against Formation of Price Bubble in the EU ETS Market

Published Online: Jun 30, 2021

Page range: 8 - 17

DOI: https://doi.org/10.2478/oszn-2021-0005

KeywordsEU ETS, EUA price, MSR, price bubble, market manipulation, speculators, price volatility, cap tightening

© 2021 Robert Jeszke et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
EU ETS, EUA price, MSR, price bubble, market manipulation, speculators, price volatility, cap tightening