Intraday and Daily Price Discovery in Carbon Markets: EUA Futures Versus Carbon ETFs

ABSTRACT We investigate intraday price discovery between EUA futures and a US‐listed carbon ETF (KEUA) using hourly data and a state‐space model that separates efficient‐price innovations from transitory noise and allows adjustment speeds to differ across trading‐hour regimes. Results show that intrinsic‐value‐relevant innovations are concentrated when the futures market is active: during ETF‐only hours, efficient‐price innovations are small and the ETF exhibits little contemporaneous adjustment, implying largely transitory quote dynamics. During overlapping hours, both markets incorporate innovations rapidly, with the ETF adjusting at least as quickly as futures on average, while time variation in relative efficiency is linked to cross‐market liquidity and policy regimes. Around major within‐sample Fit‐for‐55/EU ETS reform milestones, price discovery shifts relatively toward EUA futures, suggesting that policy‐sensitive information is incorporated primarily through the futures market. At the daily frequency, auctions, futures, and the ETF are tightly integrated: shocks transmit bidirectionally, and longer‐horizon variation is increasingly associated with ETF‐related innovations, consistent with a venue‐interactive EU ETS pricing system.