The european union emission trading scheme and energy markets : economic and financial analysis.

Summary This thesis focuses on the relationship between the EU ETS and energy markets. Particular attention is given to fuel switching, the main means of reducing short-term CO2 emissions in the EU ETS. This consists of substituting gas power plants for coal power plants in off-peak electricity generation. In this way, coal plants operate for shorter periods of time, thereby reducing CO2 emissions. Chapter 1 describes different approaches explaining the relationship between energy and CO2 markets. A literature review is then presented. We give a detailed description of the fuel switching process. In particular, the influence of plant efficiency is analyzed. Chapter 2 provides a theoretical study of the impact of efficiency differences among gas plants for fuel switching. The main result shows that the sensitivity of the CO2 price to the gas price depends on the level of CO2 emissions.Chapter 3 examines the interactions between electricity, coal, gas and CO2 prices in an empirical study. The results show that there is a significant relationship between gas and CO2 in the long-run equilibrium. Chapter 4 investigates the process of discovering the information that influences the price formation of gas and CO2. The strong relationship between gas and CO2 indicates that their prices are affected by the same information. We show in an empirical study that the CO2 market dominates the information discovery process.