Carbon emission and ethanol markets: evidence from Brazil

The production of ethanol has increased globally over the last decade. It is mainly produced from corn and sugarcane, so earlier studies mainly investigated the impact of food prices on ethanol prices. Although biofuels have been brought into the energy markets to reduce the volume of carbon emissions, the links between ethanol and carbon emission markets have not been explored sufficiently in the existing literature. This study aimed to extend the literature in this field by using a GARCH-jump process to examine whether Brazilian ethanol prices are affected by carbon emission prices. Our key findings are threefold. First, carbon emission prices affect Brazilian ethanol prices positively. Rising emission prices would therefore cause an increase in the ethanol price. Second, time-varying jumps occur in the ethanol price index. Third, the impact of emission prices on the ethanol market is asymmetric, implying that increases and decreases in emission prices would have heterogeneous effects on ethanol price levels. Our findings have important implications for scholars, investors, and policymakers. (c) 2018 Society of Chemical Industry and John Wiley & Sons, Ltd