Carbon and safe-haven flows

Abstract

This paper explores the role of European Union Allowances (EUAs) as a safe haven for a range of assets and analyses the effect of safe-haven flows on the European carbon futures market. In particular, we demonstrate that EUAs can be considered a refuge against fluctuations in corporate bonds, gold and volatility-related assets in periods of market turmoil. Furthermore, we have shown that extremely bearish and bullish movements in those assets for which the EUA acts as a safe haven induce excess volatility in carbon markets, higher carbon trading volume and larger than normal EUA bid-ask spreads. These findings support the idea that some traders, by considering carbon futures as a refuge asset, induce safe-haven flows into the carbon market. The presence of these flows provides additional insights into the financialisation of the European carbon futures market.