Environmental Engineering Reference
In-Depth Information
FINAL REMARKS
on the overall functioning of EU ETS markets
and institutions.
We have demonstrated the interdependencies
between auctions and secondary markets and have
provided a rationale for a frictionless integration
of auctioning into the overall market functioning
by using the existing secondary market infra-
structures and institutions. The reasoning behind
is based on the strong interaction of emissions
market with the adjacent energy markets, with
emissions market growing into a key interlinking
market. With auctions being an integral part of
the secondary markets, the EU ETS' integrity and
trustworthiness would be preserved.
Our concluding postulate to make auctions an
integral part of the secondary market architecture
does neither exclude nor constitute any of the
design options from coordinated decentralized
to fully centralized implementation currently in
discussion at the political stage. There are various
ways to picture hybrid and coordinated auctions
in today's secondary market infrastructure. But it
is of capital importance to protect the competitive
and innovative framework within which secondary
market infrastructure providers and institutions
can deliver an efficient and reliable market place.
Efficient functioning of any financial and com-
modity market is of substantive importance since
the continuous and transparent price discovery
provided in secondary markets is the most crucial
element in making long-term investment decisions
and in achieving the most efficient allocation of
resources. Even more, protecting market integrity
and confidence is of particular importance for
politically founded cap-and-trade markets like the
EU ETS. The reality or suspicion of an increased
vulnerability to market manipulation and exces-
sive speculation would not just undermine public
support. The high uncertainty resulting form
arbitrarily biased price signals would spill over
to adjacent energy markets as outlined in the in-
troductory remarks and subsequent considerations
of this contribution.
Departing from the foundations and economics
of cap-and-trade markets, we have confirmed in
our contribution the general conjecture that the
EU ETS is working well. But we also illustrated
the variability and frictions in pricing relations
between spot and futures as well as between
emissions and electricity markets. This led to
the conclusion that efficiency and integrity of the
secondary markets is particularly susceptible to
institutional uncertainty and frictions in supply
and demand constraints.
The sheer magnitude of the auctioning volumes
envisaged for the third trading period of the EU
ETS makes efficient auction design for the third
compliance period a unique challenge. A wrongly
designed auctioning scheme could result in arbi-
trary liquidity shocks, excessive volatilities and
distortions to secondary markets functioning. It
could undermine market integrity and confidence
the EU ETS has built its leading global role on
so far. Any decision on the design of the auction
mechanism itself, on the contracts and instruments
to be auctioned, on eligible access routes to the
auctions and finally on the post-auctioning clear-
REFERENCES
Alberola, E., Chevallier, J., & Cheze, B. (2008).
Price drivers and structural breaks in European
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787-797. doi:10.1016/j.enpol.2007.10.029
Bessembinder, H., & Lemmon, M. L. (2002).
Equilibrium pricing and optimal hedging in elec-
tricity forward markets. The Journal of Finance ,
57 , 1347-1382. doi:10.1111/1540-6261.00463
Böhringer, C., Hoffmann, T., Lange, A., Löschel,
A., & Moslener, U. (2005). Assessing emission
regulation in Europe: An interactive simulation
approach. The Energy Journal (Cambridge,
Mass.) , 26 (4), 1-21.
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