This paper studies the impact of the April allowance submissions mandate under the European Union emission trading scheme (EU ETS) in carbon emission markets. Using intraday order flow data, we test for the cross-market efficiency of spot-futures dynamics and find that the equilibrium level, adjustment speed and no-arbitrage boundaries of the spot and futures relationship shift subsequent to the submission date. In addition, our results show that the allowance submissions affect the price discovery process, with the carbon spot market providing stronger price leadership in the periods before the submission date and the futures market playing the predominant informational role thereafter. Using the heterogeneous autoregressive realized volatility (HAR-RV) model, we also find a change in volatility spillovers before the submission date, particularly from the spot to the futures market. Overall, the results suggest that the April allowance submissions have significant impact on the time series dynamics of spot and futures carbon emission markets.
NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis . Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 40, July 2015, 10.1016/j.irfa.2015.05.004.