Information Assimilation in the EU Emissions Trading Scheme: A Microstructure Study

Miss Jiayuan Chen, Michael Smurfit School of University College Dublin

The European Union’s Emissions Trading Scheme (ETS) is the key policy instrument of the European Commission’s Climate Change Program aimed at reducing carbon emissions to eight percent below 1990 levels by 2012.  The key asset traded under the scheme is the European Union Allowance (EUA).

This article examines the extent of information assimilation in the futures market of the European Union’s ETS. Using ultra high frequency data, we examine intraday futures market behaviour around major scheduled macroeconomic and emissions information announcements during Phase 2 of the European Union’s ETS, 2008-12.  We examine December expiration contracts in 2008, 2009, 2010 and in 2011.  Our study of intra-day behaviour of the European Union’s ETS futures market relates to price volatility and spreads as well as trading volume and order imbalances.

In particular, we address questions such as [1] does contemporaneous order imbalance impact market returns in the anticipated direction – do excess buy (sell) orders drive up (down) prices?; [2] do order imbalance and returns respond to announcements in a way that correctly reflects the news component?; [3] is there an increase in the level of information asymmetry subsequent to an announcement?; [4] is there information leakage evident in the EU ETS futures market and [5] what is the speed of adjustment to new information? This is the first study to raise these important questions, which pertain to information assimilation, with regard to the European Union’s ETS futures market.

As a result, this study sheds light on the adjustment of the EU ETS futures market to new information. The findings are compared to adjustments in well traded futures markets in the United States (Brandt and Kavajecz, 2004; Pasquariello and Vega, 2007).  Findings in the extant literature, with regard to low resolution data, indicate evidence in support of a maturing EU ETS futures market that is increasingly linked to the fundamentals of the emission of carbon (Bredin and Muckley, 2011).  The corresponding emergence of an efficiently determined price of carbon emissions is a necessary condition, within a market system, to incentivate the mitigation of carbon emissions. The revelation of the price of carbon may in turn influence aggregate carbon emissions and by this mechanism climate change over time.


Brandt, M., and K. Kavajecz, 2004, Price Discovery in the US Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve, The Journal of Finance, 59, 2623-2654

Bredin D., and C. Muckley, 2011, An Emerging Equilibrium in the EU Emissions Trading Scheme, Energy Economics, 33, 353-362

Pasquariello, P., and C. Vega, 2007, Informed and Strategic Order Flow in the Bond Markets, Review of Financial Studies, 20, 1975-2019

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