Understanding the Link Between Aggregated Industrial Production and the Carbon Price - Green Energy and Efficiency: An Economic Perspective - page 108

Understanding the Link Between
Aggregated Industrial Production
and the Carbon Price

Julien Chevallier

Abstract This chapter assesses the extent to which economic activity and the
carbon price are linked. Carbon price drivers can be mainly related to energy and
institutional variables. However, the in

uence of the macroeconomic environment
shall not be undermined. Various approaches exist in the literature, which favor

nancial market variables over macroeconomic variables. Following a review of the
state of the EU ETS, the main channel of transmission between the variation of
macroeconomic activity and the carbon price is recalled, by using the aggregated
industrial production as a proxy. An original empirical application unfolds, by
studying the carbon-macroeconomy relationship in the threshold VAR model
during 2005 - 2013. Further research is called upon in nonlinear econometrics.

Keywords Carbon price Economic activity Industrial production Nonlinear

time series

JEL Codes Q40 Q48 Q54

1 Introduction

The EU Emissions Trading Scheme (EU ETS) is arguably the agship of Europe ' s

climate policy approach to achieve its 2020 emissions target ( 20 %). As a cap-

and-trade program, it represents a central economic tool to achieve a cost effective
and smooth transition to a low carbon economy. However, while carbon markets
have been the predominant policy response to address greenhouse gases mitigation
in many countries, the carbon economy currently looks bleak. There are currently
no binding global

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targets beyond 2012 (post-Kyoto). In December 2011, the