Impact of UK Carbon Pricing on EU ETS Volatility

This study investigates the volatility dynamics and cross-market interactions between the European Union Emissions Trading System (EU ETS) and the UK Emissions Trading System (UK ETS) in the context of post-Brexit carbon pricing. Using daily carbon price data from January 2022 to July 2023 and employing a GARCH (1,1) model, the analysis reveals significant volatility clustering and persistence in both markets. The findings indicate a higher persistence of volatility in the UK ETS, suggesting longer-lasting impacts of market shocks compared to the EU ETS. Cross-market spillovers are observed, with shocks in one market significantly influencing the other, highlighting the interconnected nature of these systems. Notably, the UK ETS demonstrates a quicker stabilization of price movements, reflecting differences in market efficiency and regulatory structures. These insights contribute to the understanding of carbon market behavior and provide practical implications for policymakers and stakeholders aiming to enhance market stability, manage risks, and support the transition to a low-carbon economy. JEL Classification : Q54, Q58, C22