Does expected supply affect the price of emission permits? Evidence from Phase I in the European system

by Andrea Beltratti, Paolo Colla and Anna Cretì

Does current and future supply affect the market price of pemits? The answer should be positive as the market itself was created by the governments that also control the supply. However, governments themselves may be uncertain about the relation between supply and price and may go through a learning period. Do investors believe in the announcements of governments about the future supply? We find the answer was positive at least regarding Phase I of the Europen system, where empirical evidence about a current excess supply of permits was offset by announcements of a future excess demand.