Dependence changes between the carbon price and its fundamentals: A quantile regression approach

- Quantile-based dependence relationships in EUA futures market are discussed.
- Dependence of EUA-energy and EUA-macro economy vary from one phase to another.
- We found three significant structural breaks during the whole period.
- Dependence changes of EUA-energy and macro economy across the breaks are analyzed.
- Five influence paths from determinants to carbon future price are proposed.

This paper focuses on the quantile-based dependence and influence path between European Union allowance (EUA) and its drivers (energy prices and macroeconomic risk factors) during the three phases of the European Union Emissions Trading Scheme (EU ETS). Meanwhile, the quantile-based dependence changes sourced from exogenous shocks are explored as well. Our empirical evidences suggest that: (i) the reaction of fluctuation in carbon price in relation to its drivers across its conditional distribution in different phases is highly heterogeneous; (ii) production restrain effect → aggregated demand effect → substitution effect, the evolution pattern of influence paths from Phase I to Phase III exists in the prices of both coal and gas, whereas, the evolution pattern of oil price is substitution effect → production restrain effect → production restrain effect; (iii) for the macroeconomic risk factors, differing with the nearly stable energy price path in Phase I, the unstable industrial production paths are explored during Phase II and Phase III; (iv) the significant dependence changes caused by three structural breaks are confirmed during the whole period, and both effects from the occurrence of financial and energy shortage risks generate unstable dependence changes to commodity price index, coal and gas prices, but a stable dependence change to oil prices. However, the stable dependence changes to stock price index and T-bill rate are mainly affected from the occurrence of financial risk; (v) the market risk of carbon market measured by Value at Risk is mainly affected by energy prices, but commodity price index and the T-bill rate also have significant effects on it after the impact of financial risk.