On Strategic Conduct and Price Dynamics in the EU ETS: A Conduct-Parameter Model Approach

Abstract

This thesis studies how departures from price-taking behavior affect permit prices and emissions in the European Union Emissions Trading System (EU ETS). We develop a parsimonious discrete-time permit-market model with a fixed emissions cap and a reduced-form pricing rule that links allowance prices to aggregate emissions relative to the cap and to a persistent exogenous shock capturing macroeconomic and energy-market conditions. Symmetric firms choose emissions to maximize profits with quadratic revenue and abatement costs. Strategic behavior is introduced through a conduct parameter that measures the extent to which firms internalize the perceived impact of their own emissions on the permit price, with price taking as the benchmark case. The model yields closed-form expressions for equilibrium emissions and prices, facilitating calibration and simulation. The pricing rule and shock process are estimated using Phase III data on EUA futures prices, verified emissions, and total allowances, while remaining parameters are calibrated to match Phase III averages. Monte Carlo simulations indicate that stronger strategic conduct modestly reduces mean allowance prices and emissions, increases price dispersion, and leaves price persistence largely unchanged, as persistence is primarily driven by the shock process rather than by strategic behavior.