Exchange rate effect on carbon credit price via energy markets |
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Institution: | 1. Drexel University, LeBow College of Business, 3200 Market Street, Philadelphia, PA 19104, USA;2. LEO-UMR 7322, University of Orléans, Orleans, France;3. IPAG Business School, 184, Boulevard Saint-Germain, 75006 Paris, France;4. London School of Economics, Financial Markets Group (FMG), Houghton Street, London WC2 2AE, United Kingdom;5. University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057, Braga, Portugal |
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Abstract: | This paper examines the impact of currency exchange rates on the carbon market. We scrutinize this effect through the European Union Emission Trading Scheme (EU-ETS), which primarily uses two substitutable fossil energy inputs for the generation of electricity: coal and natural gas. The European coal market is directly driven by global coal markets that are denominated in USD, whereas, natural gas is mainly imported from Russia and is denominated in Euros. The impulse response functions of a Structural Vector Autoregression (SVAR) model demonstrate that a shock in the Euro/USD exchange rate can be transmitted through the channel of energy substitution between coal and natural gas, and influence on the carbon credit market. |
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Keywords: | Foreign exchange rate Carbon market Fuel-switching Structural VAR F31 Q43 Q58 |
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