A microstructure analysis of the carbon finance market

The European Union Emissions Trading Scheme is the key policy instrument of the European Commission's Climate Change Program aimed at reducing greenhouse gas emissions to 8% below 1990 levels by 2012. The key asset traded under the scheme is the European Union allowance (EUA). This article examines ultra high frequency data to assess the extent of the development in the futures market of the EU Emissions Trading Scheme. Our results indicate significant developments consistent with sequential information arrival. They also indicate a negative contemporaneous relationship between volume and volatility for all contracts. The implication is that liquidity traders dominate any role played by informed traders. Incorporating the duration between trades in our analysis has significant impact suggesting that any empirical investigation of the intra-day volume–volatility relationship needs to actively account for the impact of time elapse between trades.