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Market efficiency and the U.S. market for sulfur dioxide allowances

Author

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  • Hitaj, Claudia
  • Stocking, Andrew
Abstract
Focusing on the U.S. sulfur dioxide (SO2) allowance market from its inception in 1994 to 2009, we model allowance prices to determine the influence of market fundamentals on allowance price level and volatility. We find evidence that the SO2 market operates in ways that are not inconsistent with an efficient market – prices that reflect marginal abatement costs – after the first few years of the program but before a court decision that introduced significant uncertainty into the market in mid-2008. Our empirical analysis finds that the SO2 market, similar to other emission markets studied in the literature, can remain relatively inefficient for several years after launch. We also find that market volatility increases in response to all types of communications from the administrator, suggesting that the development of a formal communication strategy, possibly similar to that used by central banks, would reduce price volatility and increase the efficiency of the market.

Suggested Citation

  • Hitaj, Claudia & Stocking, Andrew, 2016. "Market efficiency and the U.S. market for sulfur dioxide allowances," Energy Economics, Elsevier, vol. 55(C), pages 135-147.
    • Handle: RePEc:eee:eneeco:v:55:y:2016:i:c:p:135-147
    DOI: 10.1016/j.eneco.2016.01.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Sulfur dioxide market; Efficiency; Volatility; Communication policy;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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