Permit price dynamics in the U.S. SO2 trading program: A cointegration approach

The aim of this paper is to study empirically the determination and the dynamic behavior of the SO2 permit prices. Previous research focused on ex-post market price analysis without taking weather conditions into account. Therefore, this study attempts to fill a gap in the literature by providing new empirical evidence on the SO2 price evolution and its interactions with macroeconomic variables, microeconomic variables and climate variables. Using monthly data from January 1995 to December 2006, our estimation results indicate the existence of a long-term relationship between SO2 permit price, scrubbing costs, industrial production, and weather conditions. In the short run, SO2 permit price is affected by scrubbing costs, energy prices, and weather conditions. Policy makers and private investors could benefit from the findings of this study that provides useful information on the characteristics of the SO2 market and may plan their strategy.