Exploring volatility of carbon price in European Union due to COVID-19 pandemic

Abstract

The European Union (EU) Emissions Trading System is the most important means for the EU to achieve carbon neutrality, but it has been severely affected by the outbreak of COVID-19 in Europe, and carbon price have fluctuated sharply. Research on the driving factors of carbon price during this period will help maintain the stability of the carbon emissions trading market and promote the realization of carbon neutrality. This study selected the EU carbon allowance futures price as the research object and applied the Bai–Perron structural break test to analyze the factors that influences carbon price fluctuations using the Johansen cointegration technique and the Newey–West regression estimation. Studies have shown that the outbreak of COVID-19 and the “€750 billion green recovery plan” both had a significant impact on EU carbon price. Carbon price has also undergone significant structural changes. Under the influence of these two factors, the relationship between the level of economic development and carbon price displayed a short-term negative correlation. At the same time, oil price and interbank dismantling rates were also important factors affecting carbon price, while the impact of the clean development mechanism on carbon price was not significant. The study confirmed the effectiveness of the EU’s “green recovery plan” in stabilizing the carbon market during the COVID-19 pandemic and will provide a reference for the formulation of economic recovery policies of countries around the world.