Carbon Price Analysis Using Empirical Mode Decomposition

by Makari Krause

Zhu et al. (2014) aim to enhance the science on properly setting and forecasting carbon prices. To do so they examine the European Union Emissions Trading Scheme (EU ETS) through empirical mode decomposition to better understand the formation mechanism of carbon prices. The EU ETS is the largest carbon market in the world, covering 12,000 installations and 25 countries. Over the past few years there have been a number of studies analyzing carbon prices in the EU ETS, that have generally fallen into one of two categories; structured models and data-driven models. Structured models analyze carbon price movement through the perspective of supply and demand and can help with understanding the generation of carbon prices. However, because of the unstable nature of the market, these models have been difficult to implement. Data-driven models, such as linear regressions, work well for short-term forecasting but fail to explain the driving forces behind carbon price changes. Continue reading