Essays on Carbon Pricing and Carbon Markets

Economists see climate change as a market failure that imposes huge costs and risks on future generations, who will suffer the consequences of climate change. These costs are not being reflected in current market prices. In order to internalise these costs, the notion of carbon pricing has a vital role to play. Globally, the adoption of carbon pricing is growing exponentially, but the big questions governing this trend remain unanswered. The thesis aims at addressing the gaps and providing insights on the ongoing debates on carbon pricing from different angles. The study answers four main ongoing discussions on carbon pricing globally. It addresses the following gaps: 1) the convergence and dependence of carbon markets globally; 2) the influence of stakeholders through news announcements on carbon prices; 3) the efficiency of adopting single or multiple carbon pricing and 4) the presence of renewable energy coupled with technology and carbon prices to influence stock prices. The first paper reviews the dependence structure between eight carbon markets globally through different copulas for the period 2011-2019. The objective is to see convergence towards a global carbon market. The results demonstrate an asymmetric relationship between most carbon markets but a higher tail dependence between carbon markets that have linkage agreements, ongoing cooperation, or are geographically close. The second paper looks into the impact of news announcements on carbon prices across eight carbon markets by defining seven categories of the news from Bloomberg for the period January 2015 to June 2020. The results showcase that news announcements have an impact on carbon prices, and the magnitude of the market reaction is a function of the type of news. Positive news seems to have a longer effect than negative news. Similarly, the news' categories tend to influence the carbon markets differently. Carbon markets react more to market reforms than to other announcements such as controversies, lobbying, or the Paris Agreement. The third paper investigates the race for carbon pricing amongst firms i.e., the adoption of single or multiple carbon pricing mechanisms (carbon trading, carbon tax, and/or internal carbon price) on the environmental performance of 2,303 firms. The results show that while carbon taxes can independently provide significant improvements in environmental performance, carbon trading and internal carbon pricing are ineffective on their own, and can even be detrimental in some cases. There are significant heterogeneities in the effectiveness of CPMs in carbon-intensive sectors versus other sectors and in different regions. The fourth paper showcases the presence of renewable energy in a carbon pricing world and how it impacts on stock prices through the Divisia Index. The paper retrieves data for both the price and consumption of fossil energy (oil, coal, and gas) and renewable energy (solar, wind, and hydro). A Vector Autoregressive (VAR) model has been estimated over the period 2000-2019 across 25 countries globally. The study identifies significant time-dependent dynamics between renewable energy and both the energy stock and carbon markets, while fossil energy has no significant influence on those markets. (author)