Significant research has been conducted on the price determinants of carbon permits traded through the EU-ETS, but limited research detecting structural breaks in these relationships exists. This paper looks to identify structural breaks in EUA price and link these breaks to policy events to determine the effect of non-market forces on the price of carbon permits during the first and second periods of the program. An algorithm proposed by Bai and Perron (2002) is employed to detect endogenous structural breaks across multiple econometric specifications. This paper reveals four robust structural breaks in addition to eight breaks with potential explanatory significance. These are linked to significant policy events which directly impact the carbon permit market as well as those which have larger-scale economic effects. The resulting implications are that these structural breaks are significant in terms of their effect on the price of carbon permits, and that events which cause such breaks should be closely followed. In addition, the future of the EU-ETS could see additional measures come into play which will not only alter the structure of the system which is in place, but potentially counteract many of the persistent problems the EU-ETS has witnessed through the end of 2012.
