Degree Name

Masters of Finance - Research


School of Accounting & Finance


In 2005 the European Union (EU) began the first phase of the largest and most ambitious emissions trading system (EU ETS) ever attempted, which then applied to all members of the EU. From its second phase in 2008, the EU ETS applies to all 27 members of the EU together with the three members of the European Economic Area, being Norway, Iceland and Lichtenstein. Under the EU ETS, permits to emit carbon into the atmosphere known as European Union Allowances (EUAs) are traded in a manner which is similar to the trading of financial instruments and a range of derivatives has developed with the total value of the market now above €120b, a market dominated by a few large players.

Essentially, the carbon market establishes an arena that plays the role of a mediator between the environment/climate and the economy. At this stage significant market failures in the operation of the European carbon market have been noted. Evidence from Europe demonstrates that the EU ETS has failed to reduce emissions in Phase One (2005-2007) and is not yet succeeding in Phase Two (2008-2012) of its operation. The EU Scheme has not worked in an economic sense as emissions were only marginally reduced, while the major problem with the European carbon market was its substantial price volatility. This left carbon participants with uncertainty, thus introducing more ambiguity and instability into the carbon market. Consequently, the price of carbon collapsed to almost zero in Phase One, creating no price incentive to reduce pollution. As a result, instead of being reduced, carbon emissions from installations covered by the EU ETS actually rose during the first three years of its operation. This leaves many with scepticism regarding the effectiveness and efficiency of the EU ETS.

This thesis reports the results of an empirical investigation into the factors which appear to drive the carbon price and the key determinants of the price of an EUA. Empirical studies underpinned by a positivist social science approach have been implemented as the principal methodologies for conducting this research. Over the last decade a number of environmental products have been developed alongside the EUA, including Certified Emissions Reductions (CERs), Renewable Energy Certificates (RECs) and White Certificates (energy efficiency credits) and markets have developed for a range of these environmental products. A better understanding of the determinants of these markets will help regulators manage these new markets and market participants to deal with their exposure to the market and this study aims to further this understanding.