Predicting the Price of EU ETS Carbon Credits

The aim of this paper is to examine what drives the changes in price of carbon credits in the European Union's Emission Trading Scheme (EU ETS) and to make predictions based on these relationships. The study is based on dataset from the United Kingdom (UK) energy market and global equity indices. The large dataset is reduced in dimension using correlation analysis and predictions are then made by multiple linear regression. Certified emission reduction units (CERs) are shown to be the only same-day market relationship which provides useful predictions of European Union Allowance prices (EUAs). No significant correlation is found between EUAs and the UK power market and the theoretical price of carbon credits; switching price, is shown to be a poor indicator of the price of carbon credits.