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This article investigates the modelling of the convenience yield in the European carbon market by using daily and intradaily measures of volatility. The convenience yield stems from differences in spot and futures prices, and can explain why firms hold inventories. The main findings are that (i) a simple AR(4) process best describes the 2008 convenience yield, and (ii) there exists a non linear relation between spot and futures prices. The approach developed in this article captures 74% of the explanatory power for the 2008 convenience yield variable in an autoregressive framework, with carbon spot price levels, moving averages and carbon futures realized volatility measures as exogenous regressors. These results are of interest for energy utilities, risk-managers, and traders exposed to the variation of carbon prices.

The European Union Emissions Trading Scheme (EU ETS) is the largest emissions trading scheme to date. This article summarizes the principle elements behind the trading system, and details the carbon price dynamics during Phase II (2008-2012), along with an analysis of traded volumes. The main findings emphasize that the EU ETS is a rapidly growing market, which yields to innovative learning process for all participants involved: policy makers, industrial operators, and financial analysts. Besides, these results shed some light on the usefulness of credit project mechanisms, which may result in the medium-term in integrated ‘world' carbon markets between various regional and/or national ETS.

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

Since the creation of the European Union Emissions Trading Scheme (EU ETS) in 2005, a burgeoning academic literature has emerged to identify the factors that shape the price of carbon, where one European Union Allowance is equal to one ton of CO2-equivalent emitted in the atmosphere. Thus, there is a need for an updated and thorough literature review on the state-of-the-art on topic that this paper aims to fulfill. Namely, the author considers the main econometric studies that have been recently published in the academic literature, which feature the influence of the following determinants to explain the variation of the price of carbon: institutional decisions; energy prices and weather events; macroeconomic and financial market shocks. The paper concludes with some directions for future research in this area.