what policy adjustments in the eu ets truly affected the carbon prices abstract carbon market becomes increasingly popular as a cost effective instrument to mitigate co 2 emissions however its construction is a learning by doing process and needs consistent regulatory updates in order to deliver optimal effects this paper uses the event study method to assess the impacts of different policy adjustments on the eua returns in the european union emissions trading scheme eu ets since 2005 comparing to existing studies that focus on the impact of a single policy this paper provides a complementary reference on if and to what extent policy adjustments can impact the carbon prices by classifying all regulatory update events into six categories its key findings are as follows first aggregate impacts of total 50 events studied are low while impacts of events having underlying negative impacts are higher than those having underlying positive impacts second 24 events have significant impacts on eua returns and are coherent to their theoretical impacts except one event third events having negligible impact on eua returns are those that are announced not for the first time or those having no impact on co 2 quotas supply and demand finally there are different impact patterns some events have different impacts on short end and long end carbon prices

financing renewable energy infrastructure formulation pricing and impact of a carbon revenue bond abstract renewable energy systems depend on large financial incentives to compete with conventional generation methods market based incentives including state level rec markets and international carbon markets have been proposed as solutions to increase renewable energy investment in this paper we introduce and formulate a carbon revenue bond a financing tool to complement environmental credit markets to encourage renewable energy investment to illustrate its use we value the bond by predicting future revenue using stochastic processes after analyzing historical price data three illustrative examples are presented for renewable energy development in three different markets europe australia and new jersey our findings reveal that the sale of a carbon revenue bond with a ten year maturity can finance a significant portion of a project s initial cost

role of carbon swap trading and energy prices in price correlations and volatilities between carbon markets the present paper theoretically and empirically examines the role of carbon swap trading and energy prices in volatilities and price correlations between the eu and kyoto protocol emissions trading schemes a supply and demand based correlation model between eua and scer price returns is proposed in detail using inverse box cox type marginal abatement cost mac curves and simple emission reduction volume processes the model includes financial players eua scer swap transaction in boom periods of carbon prices using the logit model for eua and eua scer swap volume correlations and stronger energy price impacts on eua prices than scer prices using a mean reverting lognormal process for energy prices the empirical studies using eua and scer prices estimate the model parameters resulting in a positive eua volume impact on eua scer swap transactions and a positive energy price impact on eua prices it is shown that high eua scer price correlations during high eua price periods stemmed from eua scer swap transactions whereas high eua scer price correlations during the period of financial turmoil with low eua prices came from the drop in energy prices we also show that the leverage effects often observed in security markets exist in both the eua and scer markets according to the price volatility relation

price determination in the eu ets market theory and econometric analysis with market fundamentals abstract we investigate the price determination of the european union emission allowance eua of the european union emissions trading scheme eu ets we postulate an uncertain permit price and risk averse firms which have the possibility to hedge in the forward market the firms produce final goods abate their emissions and trade permits in the permit market the dependence of the equilibrium permit price on exogenous variables is studied in a permit market model we test our theoretical findings with empirical data from 2005 to 2010 in the eu ets market we use daily forward prices of eua as our dependent variable we use several econometric models with multiple stationary time series to discover that there is a strong relationship between the fundamentals such as german electricity prices and gas and coal prices with the price of eua we find that the eua forward price depends on fundamentals especially on the price of electricity as well as on the gas coal difference in a statistically significant way

stochastic convenience yield and the pricing of oil contingent claims this paper develops and empirically tests a two factor model for pricing financial and real assets contingent on the price of oil the factors are the spot price of oil and the instantaneous convenience yield the parameters of the model are estimated using weekly oil futures contract prices from january 1984 to november 1988 and the model s performance is assessed out of sample by valuing futures contracts over the period november 1988 to may 1989 finally the model is applied to determine the present values of one barrel of oil deliverable in one to ten years time

transactions in the european carbon market a bubble of compliance in a whirlpool of speculation the european union emissions trading scheme eu ets is supposed to help regulated installations to cover their co2 emissions by trading in allowances in practice the eu ets is mainly a financial market used for hedging and speculation this financial feature is regarded as a solution hedging and liquidity to a problem the price risk and volatility imposed on installations which the market has actually created itself this paper provides an estimation of the real underpinning of the scheme i e the needs of installations for allowances transfers to achieve compliance in the two first exchange periods this estimation which was singularly lacking in the literature shows that compliance transactions become more and more marginal as market activity grows and that they are drowned in a whirlpool of speculation this challenges the role of the carbon price whose financial and self referential evaluation can obviously not reveal installations marginal abatement costs the condition of cost effectiveness expected from carbon trading

what explains the short term dynamics of the prices of co2 emissions using the vector auto regression var and the vector error correction models vecm this paper analyzes the short term dynamics of the prices of co2 emissions in response to changes in the prices of oil coal natural gas electricity and carbon emission allowances the results show that i a positive shock to the crude oil prices has a negative effect on the co2 allowance prices ii an unexpected increase in the natural gas prices raises the price of co2 emissions iii a positive shock to the prices of the fuel of choice coal has virtually no significant impact on the co2 prices iv there is a clear positive effect of the coal prices on the co2 allowance prices when the electricity prices are excluded from the var system and v a positive shock to the electricity prices reduces the price of the co2 allowances we also find that the energy price shocks have a persistent impact on the co2 allowance prices with the largest effect occurring six months after a shock strikes the effect is particularly strong in the case of the natural gas price shocks additionally we estimate that it takes between 7 3 and 9 6 months to halve the gap between the actual and the equilibrium prices of the co2 allowances i e to erase any price over or undervaluations after a shock strikes finally the empirical findings suggest an important degree of substitution between the three primary sources of energy i e crude oil natural gas and coal particularly when electricity prices are excluded from the var system

optimal control for transboundary pollution under ecological compensation a stochastic differential game approach abstract to account for previously ignored yet widely observed uncertainty in nature s capability to replenish the natural environment in ways that should inform ideal design of ecological compensation ec regimes this study constructs a stochastic differential game sdg model to analyze transboundary pollution control options between a compensating and compensated region equilibrium strategies in the stochastic two player game inform optimal control theory and reveal a welfare distribution mechanism to form the basis of an improved cooperative game contract a case based numerical example serves to verify the theoretical results and supports three key insights first accounting for various random disturbance factors the probabilistic pollutant stock in stackelberg non cooperative game exceeds that of a cooperative game situation second the ec mechanism provides long term effective incentives only when the marginal losses of environmental damage in the compensating region are more than twice that of the compensated region achieving a pareto optimal equilibrium relies upon the attainment of a dynamic allocation ratio derived from the analysis of a robust welfare allocation mechanism third cross region cooperation reliably outperforms stackelberg non cooperation due to either overwhelming incumbent economic interests or high abatement costs this study illuminates the importance of balancing both parties interests within an ec agreement while reducing uncertainty around unobserved environmental factors during ex ante negotiations

equilibrium price dynamics of emission permits this article presents a stochastic equilibrium model for environmental markets that allows us to study the characteristic properties of emission permit prices induced by the design of today s cap and trade systems we characterize emission permits as highly nonlinear contingent claims on economy wide emissions and reveal their hybrid nature between investment and consumption assets our model makes predictions about the dynamics and volatility structure of emission permit prices the forward price curve and the implications for option pricing in this market empirical evidence from existing emissions markets shows that the model explains the stylized facts of emission permit prices and related derivatives

nonparametric modeling of carbon prices this paper constitutes the first exercise of nonparametric modeling applied to carbon markets the framework of analysis is carefully detailed and the empirical application unfolds in the case of bluenext spot and ecx futures prices the data is gathered in daily frequency from april 2005 to april 2010 first we document the presence of strong nonlinearities in the conditional mean functions second the conditional volatility functions reveal an asymmetric and heteroskedastic behavior which is dramatically different between carbon spot and futures logreturns the results for spot prices are also robust to subsamples decomposition third we show in an out of sample forecasting exercise that nonparametric modeling allows reducing the prediction error by almost 15 compared to linear ar models this latter result is confirmed by the diebold mariano pairwise test statistic

dynamic evolution characteristics of european union emissions trade system price from high price period to low price period abstract carbon market is a valid measure for promoting green and low carbon development and price is the core of market mechanism in this work combining directed limited penetrable visibility graph and coarse graining method a new method is proposed to identify the potential periods and dynamic evolution characteristics of carbon price which opens up a new perspective for government and investors to understand evolution characteristics and prevent risks at the same time a empirical analysis is conducted based on eu ets daily price from september 29 2009 to september 29 2017 and the dynamic fluctuation characteristics of carbon price from high price period to low price period are obtained

banning banking in eu emissions trading abstract admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter temporal flexibility cost savings can be traded over time however unless individual eu member states ms decide differently the transfer of unused allowances from the period of 2005 2007 into the first commitment period under the kyoto protocol i e 2008 2012 will be prohibited in this paper we first explore the implications of such a ban on banking when initial emission targets are lenient this analysis is based on a simulation which was recently carried out in germany with companies and with a student control group the findings suggest that a eu wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter temporal flexibility second we use simple game theoretic considerations to argue that under reasonable assumptions such a eu wide ban on banking will be the equilibrium outcome thus to avoid a possible prisoners dilemma ms should have co ordinated their banking decisions

an econometric analysis of emission allowance prices knowledge of the statistical distribution of the prices of emission allowances and their forecastability are crucial in constructing among other things purchasing and risk management strategies in the emissions constrained markets this paper analyzes the two emission permits markets co2 in europe and so2 in the us and investigates a model for dealing with the unique stylized facts of this type of data its effectiveness in terms of model fit and out of sample value at risk forecasting as compared to models commonly used in risk forecasting contexts is demonstrated

modeling and forecasting the volatility of carbon emission market the role of outliers time varying jumps and oil price risk abstract the objectives of this study are three fold first we aim to assess whether outliers or extreme observations occur in the european union allowance eua data second we examine if time varying jumps are present in the carbon emission market third we use the crude oil volatility index ovx to investigate the effect of oil market uncertainty on the emission price volatility in order to detect the possible outliers in the eua market we employ a standard methodology proposed by ane et al 2008 and identify several outliers in the emission data after spotting and then removing those extreme points we apply the garch jump models to both original and outlier free observations the results of the jump model show that while time varying jumps do exist in the uncorrected data most of the jump parameters however become insignificant in case of outlier free observations next the application of an extended egarch model in which ovx is introduced in the garch specification demonstrates that emission prices are highly sensitive to oil market implied volatility and that the impact of ovx on the eua market appears to be asymmetric additionally the use of forecast encompassing test documents that considering the outlier free data and using the information content of ovx would improve the volatility forecasts for the carbon emission market the results of our research carry important implications for both investors and policymakers

detecting instability in the volatility of carbon prices this article investigates the presence of outliers in the volatility of carbon prices we compute three different measures of volatility for european union allowances based on daily data egarch model option prices implied volatility and intraday data realized volatility based on the methodology developed by zeileis et al 2003 and zeileis 2006 we detect instability in the volatility of carbon prices based on two kinds of tests retrospective tests ols recursive based cusum processes f statistics and residual sum of squares and forward looking tests by monitoring structural changes recursively or with moving estimates we show evidence of strong shifts mainly for the egarch and iv models during the time period overall we suggest that yearly compliance events and growing uncertainties in post kyoto international agreements may explain the instability in the volatility of carbon prices

carbon trading thickness and market efficiency abstract this note tests for the efficient market hypothesis emh in the market for co 2 emission allowances in phase i and phase ii of the european union emissions trading scheme eu ets as usually is the case in emerging and non competitive markets such as the eu ets trading often not occurs on a frequent basis this has adverse implications for both the gains from permit trade as well as biases the emh tests variance ratio tests are employed to adjust for the thin trading effect the results indicate that phase i the trial and learning period was inefficient whereas the first period under phase ii shows signs of restoring market efficiency

on the efficiency of the european carbon market new evidence from phase ii i examine in the period 2008 2011 the efficiency of four carbon dioxide co2 emission allowance futures traded in the intercontinental exchange ice to this end i assess the profitability of trading strategies based on simple technical analysis rules and naive forecasts the results from 2010 onwards are consistent with weak market efficiency in turn this finding suggests that the european carbon market is gradually attaining a state of maturity

price discovery and volatility spillovers in the european union emissions trading scheme a high frequency analysis abstract this paper models the relationship of european union allowance spot and futures prices within the second commitment period of the european union emissions trading scheme based on high frequency data we analyze the transmission of information in first and second conditional moments to reveal long run price discovery we compute common factor weights of schwarz and szakmary 1994 and information shares of hasbrouck 1995 based on estimated coefficients of a vecm to analyze the short run dynamics we perform granger causality tests we identify the futures market to be the leader of the long run price discovery process whereas the informational role of the futures market increases over time in addition we employ a version of the ueccc garch model as introduced by conrad and karanasos 2010 to analyze the volatility transmission structure the volatility analysis indicates a close relationship between the volatility dynamics of both markets whereas in particular we observe spillovers from the futures to the spot market as a whole the investigation reveals that the futures market incorporates information first and then transfers the information to the spot market

pricing methods and hedging strategies for volatility derivatives abstract we explore the valuation and hedging of discretely observed volatility derivatives using three different models for the price of the underlying asset geometric brownian motion with constant volatility a local volatility surface and jump diffusion we begin by comparing the effects on valuation of variations in contract design such as the differences between specifying log returns or actual returns and incorporating caps on the level of realized volatility we then focus on the difficulties associated with hedging these products delta hedging strategies are ineffective for hedging volatility derivatives since they require very frequent rebalancing moreover they provide limited protection in the jump diffusion context we study the performance of a hedging strategy for volatility swaps that establishes small fixed positions in vanilla options at each volatility observation

spot and derivative pricing in the eex power market using spot and futures price data from the german eex power market we test the adequacy of various one factor and two factor models for electricity spot prices the models are compared along two different dimensions 1 we assess their ability to explain the major data characteristics and 2 the forecasting accuracy for expected future spot prices is analyzed we find that the regime switching models clearly outperform its competitors in almost all respects the best results are obtained using a two regime model with a gaussian distribution in the spike regime furthermore for short and medium term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot a situation which is denoted as contango

smart srec a stochastic model of the new jersey solar renewable energy certificate market markets for solar renewable energy certificates srecs are gaining in promi nence in many states stimulating growth of the u s solar industry however srec market prices have been extremely volatile causing high risk to participants and potentially less investment in solar power generation such concerns necessitate the development of realis tic flexible and tractable models of srec prices that capture the behavior of participants given the rules that govern the market we propose an original stochastic model called smart srec to fill this role building on established ideas from the carbon pricing liter ature and including a feedback mechanism for generation response to prices we calibrate the model to the new jersey market and backtest it analyzing parameter sensitivity and demonstrating its ability to reproduce historical dynamics finally we run simulations to investigate the role and impact of regulatory parameters thus providing insight into the crucial role played by market design

modeling eu allowances and oil market interdependence implications for portfolio management abstract this paper examines the dependence structure between european union allowances euas and crude oil markets during the second commitment period of the european union emissions trading scheme and the implications for portfolio management using different copula models our findings suggest positive average dependence and extreme symmetric independence that is consistent with interdependence and no contagion effects between the eua and crude oil markets the implication of this result for eua oil portfolios points to the existence of diversification benefits hedging effectiveness and value at risk reductions the eua market is therefore an attractive market for investors in terms of diversifying market risk and reducing downside risk in crude oil markets

modeling and explaining the dynamics of european union allowance prices at high frequency in this paper we model the adjustment process of european union allowance eua prices to the releases of announcements at high frequency controlling for intraday periodicity volatility clustering and volatility persistence we find that the high frequency eua price dynamics are very well captured by a fractionally integrated asymmetric power garch process the decisions of the european commission on second national allocation plans have a strong and immediate impact on eua prices on the other hand our results suggest that eua prices are only weakly connected to indicators about the future economic development as well as the current economic activity

timing and eco nomic efficiency of climate friendly investments in supply chains abstract emission trading schemes such as the european union emissions trading system euets attempt to reconcile economic efficiency with ecological efficiency by creating financial incentives for companies to invest in climate friendly innovations using real options methodology we demonstrate that under uncertainty economic and ecological efficiency continue to be mutually exclusive this problem is even worse if a climate friendly project depends on investing in of a whole supply chain we model a sequential bargaining game in a supply chain where the parties negotiate over implementation of a carbon dioxide co2 saving investment project we show that the outcome of their bargaining is not economically efficient and even less ecologically efficient furthermore we show that a supply chain becomes less economically efficient and less ecologically efficient with every additional chain link finally we make recommendations for how managers or politicians can improve the situation and thereby increase economic as well as ecological efficiency and thus also the eco efficiency of supply chains

the economics of pollution permit banking in the context of title iv of the 1990 clean air act amendments abstract this paper presents a model of the collective emission permit banking behavior of electricity generating units affected by title iv of the clean air act amendments of 1990 a rigorous treatment of the constraint that pollution permits cannot be borrowed from future allocations is introduced this approach enables an analysis of the impact of future changes in electricity demand regulations and technologies on the present permit price and emissions level the effect of uncertainty on the banking behavior is also explored

the impacts of eu co2 emissions trading on electricity markets and electricity consumers in finland abstract in this paper the likely impacts of the eu emission trading system on the nordic electricity market and on the position of various market actors are assessed in its first phase the eu co 2 emission trading system includes power plants with thermal capacity greater than 20 mw metals industry pulp and paper industry mineral industry and oil refineries this paper describes the assessment done for the finnish minister of trade and industry analysing the likely impacts on power plant operators on energy intensive industries on other industries and on other consumer groups the impacts of emissions trading were studied with the vtt electricity market model and with the times energy system model the annual average electricity price was found to rise 0 74 eur mw h 1 for every 1 tonne co 2 1 in the nordic area large windfall profits were estimated to incur to electricity producers in the nordic electricity market in finland metals industry and private consumers were estimated to be most affected by the electricity market price increases expanded nuclear power generation could limit the increases in the prices of electricity to one third compared to those in the base case

on the stochastic properties of carbon futures prices pricing carbon is a central concern in environmental economics due to the worldwide importance of emissions trading schemes to regulate pollution this paper documents the presence of small and large jumps in the stochastic process of the co 2 futures price the large jumps have a discrete origin i e they can arise from various demand factors or institutional decisions on the tradable permits market contrary to the existing literature we show that the stochastic process of carbon futures prices does not contain a continuous component brownian motion the results are derived by using high frequency data in the activity signature function framework todorov and tauchen in j econom 154 125 138 2010 todorov and tauchen in j bus econ stat 29 356 371 2011 the implication is that the carbon futures price should be modeled as an appropriately sampled centered levy or poisson process the pure jump behavior of the carbon price might be explained by the lower volume of trades on this allowance market compared to other highly liquid financial markets

modeling co2 emission allowance prices and derivatives evidence from the european trading scheme this paper studies the three main markets for emission allowances within the european union emissions trading scheme eu ets powernext nord pool and european climate exchange ecx the analysis suggests that the prohibition of banking of emission allowances between distinct phases of the eu ets has significant implications in terms of futures pricing motivated by these findings we develop an empirically and theoretically valid framework for the pricing and hedging of intra phase and inter phase futures and options on futures respectively

research on the efficiency of carbon trading market in china abstract in 2014 china proposed medium and long term low carbon development goals in china u s joint statement on climate change that the emission of carbon dioxide would reach its peak and the proportion of non fossil energy accounted for the primary energy consumption would increase to 20 in 2030 in order to achieve these goals the unified carbon emission trading system should be put into effect by 2017 the implementation of the unified carbon emission trading system depends on the effectiveness of the current carbon trading market in china on the basis of the effective market theory and fair game model the unit root test and the run test are developed to analyze the carbon emission market of four representative cities in china the results show that 1 the carbon trading market in china has only achieved weak efficiency while the semi strong efficiency and the strong efficiency have not been reached 2 with the expansion of the market scale the increase of trading volume the carbon trading market would converge from the state of inefficiency to weak form efficiency gradually and the carbon trading market in china shows signs of restoring market efficiency

forecasting carbon futures volatility using garch models with energy volatilities abstract this article examines the volatility forecasting abilities of three approaches garch type model that uses carbon futures prices an implied volatility from carbon options prices and the k nearest neighbor model based on the results we document that garch type models perform better than an implied volatility and the k nearest neighbor model this result suggests that carbon options have little information about carbon futures due to their low trading volume we also investigate whether the volatilities of energy markets i e brent oil coal natural gas and electricity forecast following day s carbon futures volatility according to the results we suggest that brent oil coal and electricity may be used to forecast the volatility of carbon futures

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

a model of intertemporal emission trading banking and borrowing abstract this paper provides a general treatment of emission trading banking and borrowing in an intertemporal continuous time model using optimal control theory the decentralized behavior of firms is shown to lead to the least cost solution attainable under joint cost minimization explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits the policy implications of emission banking and borrowing are discussed

multiple bubbles in the european union emission trading scheme abstract the european union emission trading scheme eu ets is the first large scale co 2 emission trading system in the world carbon allowances are financial assets potentially vulnerable to the behavior of traders and investors in fact the carbon price has been quite volatile since the inception of the market and it has recently hit very low values however to date no work exists to evaluate whether volatility and price spikes are due to episodes of speculation and price bubbles our paper fills this gap we use the recent approaches developed by phillips and yu 2010 phillips et al 2011 and phillips et al 2015a 2015b who propose a recursive right sided unit root approaches to detect and date stamp mildly explosive behaviors and carbon market exuberance we complement this methodology by using the wild bootstrap procedure by goncalves and kilian 2004 to control for the heteroschedasticity of carbon price data analyzing the eu ets front month contract price from 2005 to 2014 we find different episodes of price bubbles these episodes are not explained by similar behavior of the fundamentals but seem related to energy and environmental policy announcements our results can provide insightful policy implications in the context of the actual carbon market reform as well as the implementation of stricter financial regulations rules to co 2 trading

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

market efficiency in the european carbon markets in this paper we study the relationship between futures and spot prices in the european carbon markets from the cost of carry hypothesis the aim is to investigate the extent of efficiency market the three main european markets bluenext eex and ecx are analyzed during phase ii covering the period from march 13 2009 to january 17 2012 futures contracts are found to be cointegrated with spot prices and interest rates for several maturities in the three co2 markets results are similar when structural breaks are taken into account according to individual and joint tests the cost of carry model is rejected for all maturities and co2 markets implying that neither contract is priced according to the cost of carry model the absence of the cost of carry relationship can be interpreted as an indicator of market inefficiency and may bring arbitrage opportunities in the co2 market

long term association between european and indian markets on carbon credit price abstract this study tries to explore cointegration and granger causality of daily cer prices in european energy exchange and multi commodity exchange mcx in india in a multivariate framework after controlling euro rupee exchange rate and inter bank offer rate a measure of country specific risk both ardl bounds tests and johansen juselius maximum likelihood procedures fail to establish a cointegrating relationship among the variables indicating that an arbitrage opportunity exists between these two markets the study however establishes a short term granger causality running from change in cer price in european energy exchange and exchange rate to indian exchange generalised error variance decomposition of variables indicates that the price of cer at the indian stock exchange is most endogenous in nature

are electricity risk premia affected by emission allowance prices evidence from the eex nord pool and powernext the links between emission and energy markets are of great interest to practitioners academics and policy makers in this paper it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the european union emissions trading scheme eu ets we discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets we also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances analysis of data from three major markets the eex nord pool and powernext offers empirical support to our conjecture these findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the eu ets regulative framework and design over the next years moreover our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants

carbon emission permit price volatility reduction through financial options we develop a stylized model to investigate the impact of financial options on reducing carbon permit price volatility under a cap and trade system the existence of an option market provides a mechanism to hedge the uncertainty of future spot prices and is a stimulus for investment in carbon emission abatement technologies we show that both the spot price level and the price volatility of carbon permits can be reduced via the trading of financial options while achieving the emission reduction target we also show that introducing financial options in a banking environment offers more flexibility to risk management in carbon permit trading

modeling the price dynamics of co2 emission allowances abstract in this paper we analyze the short term spot price behavior of carbon dioxide co 2 emission allowances of the new eu wide co 2 emissions trading system eu ets after reviewing the stylized facts of this new class of assets we investigate several approaches for modeling the returns of emission allowances due to different phases of price and volatility behavior in the returns we suggest the use of markov switching and ar garch models for stochastic modeling we examine the approaches by conducting an in sample and out of sample forecasting analysis and by comparing the results to alternative approaches our findings strongly support the adequacy of the models capturing characteristics like skewness excess kurtosis and in particular different phases of volatility behavior in the returns

the market for sulfur dioxide emissions the 1990 clean air act amendments initiated the first large scale use of the tradable permit approach to pollution control the theoretical case for this approach rests on the assumption of an efficient market for emission rights the authors empirical analysis shows that the emission rights market created by the 1990 amendments had become reasonably efficient by mid 1994 they also show that the auctions specified in the amendments to jump start trading had become a small part of the overall market finally the authors demonstrate that the strategic bidding behavior discussed in the literature has had no effect on market prices copyright 1998 by american economic association

carbon price drivers phase i versus phase ii equilibrium abstract the aim of this paper is to investigate the determinants of the carbon price during the two phases of the european union emission trading scheme eu ets more specifically relying on daily eu allowance futures contracts we test whether the carbon price drivers identified for phase i still hold for phase ii and evolve toward a long run relationship using cointegration techniques and accounting for the 2006 structural break in the carbon market we show that while a cointegrating relationship exists for both phases of the eu ets the nature of this equilibrium relationship is different across the two subperiods with an increasing role of fundamentals in phase ii deriving equilibrium values we show that the carbon price tends to be undervalued since the end of 2009

the effect of trade between china and the uk on national and global carbon dioxide emissions we estimate the amount of carbon dioxide embodied in bi lateral trade between the uk and china in 2004 developing and applying the method of shui and harriss 2006 tile role of co2 embodiment in us china trade energy policy 34 4063 4068 the most recently available data on trade and co2 emissions have been updated and adjusted to calculate the co2 emissions embodied in the commodities traded between china and the uk it was found that through trade with china the uk reduced its co2 emissions by approximately 11 in 2004 compared with a non trade scenario in which the same type and volume of goods are produced in the uk in addition due to the greater carbon intensity and relatively less efficient production processes of chinese industry china uk trade resulted in an additional 117 mt of co2 to global co2 emissions in the same one year period compared with a non trade scenario in which the same type and volume of goods are produced in the uk this represents an additional 19 to the reported national co2 emissions of the uk 555 mt y in 2004 and 0 4 of global emissions these findings suggest that through international trade very significant environmental impacts can be shifted front one country to another and that international trade can but does not necessarily result in globally increased greenhouse gas emissions these results are additional to the environmental consequences of transporting goods which are not robustly quantified here c 2008 elsevier ltd all rights reserved

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

industry wide corporate fraud the truth behind the volkswagen scandal corporate fraud committed under climate mitigation pressures is becoming more frequently observed in line with the ever increasing environmental standards and relevant regulation enforcements one example is the volkswagen emission gate scandal using firm level panel data of major automobile manufacturers from 2000 to 2015 this study empirically identifies the motives behind the corporate deception scandal we develop a conceptual model summarising the factors affecting decision making and the firms environmentally responsible investments eris including the truthfulness of related public communications our findings identify legal and regulatory pressures the firm s existing level of eris competency and expertise pressures from emission regulation market competitors consumers owners or shareholders as the key factors inducing the scandal the empirical findings show that firms are more likely to experience corporate fraud if their senior managers are paid with substantial variable components that may lead them to engage in riskier business behaviour and to be more short term focused thereby supporting the well established contract theory to avoid corporate fraud and engage in legitimate business competitiveness we suggest that firms should focus on technological innovation as well as improving corporate governance and leverage ratios to effectively control and monitor management in addition policy makers should be more realistic about practical and commercial limitations in the policy setting process and take on a more supporting role in achieving technological innovations and effective corporate governance in summary we argue that cleaner production is not only the result of technologically progress and research but importantly it also involves issues associated with corporate governance and business ethics

a model of carbon price interactions with macroeconomic and energy dynamics abstract this paper develops a model of carbon pricing by considering two fundamental drivers of european union allowances economic activity and energy prices on the one hand economic activity is proxied by aggregated industrial production in the eu 27 as it provides the best performance in a preliminary forecasting exercise vs other indicators on the other hand brent natural gas and coal prices are selected as being the main carbon price drivers as highlighted by previous literature the interactions between the macroeconomic and energy spheres are captured in a markov switching var model with two states that is able to reproduce the boom bust business cycle hamilton 1989 first industrial production is found to impact positively negatively the carbon market during periods of economic expansion recession thereby confirming the existence of a link between the macroeconomy and the price of carbon second the brent price is confirmed to be the leader in price formation among energy markets bachmeier and griffin 2006 as it impacts other variables through the structure of the markov switching model taken together these results uncover new interactions between the recently created eu emissions market and the pre existing macroeconomic energy environment

carbon trading across sources and periods constrained by the marrakesh accords abstract we examine the potential effects on permit prices and abatement costs of four compliance rules governing emissions trade across sources and periods in the kyoto protocol the banking rule that allows excess permits to be used later the restoration rate rule that penalizes borrowing the commitment period reserve rule that limits sales and finally the suspension rule that restricts borrowing and sales our framework is a two period model where parties may be out of compliance in the kyoto period but are assumed to comply at a later time under varying assumptions about market power and us participation we find that the rules may have pronounced effects on individual costs but overall efficiency is not severely affected

modeling and forecasting the volatility of carbon dioxide emission allowance prices a review and comparison of modern volatility models abstract the launch of the markets for carbon dioxide emission allowances was guided by the aim to use the supposedly efficient price formation mechanism of an organized exchange to optimally allocate a certain quantity of emissions among potential polluters while this introduction of a centralized trading arrangement should have helped to achieve required emission reductions with a minimum of economic losses from the viewpoint of market participants it has raised concerns about appropriate risk management provisions to cope with the fluctuations of time varying allowance prices the present review provides an overview over state of the art models for price volatility expanding the scope from relatively simple garch type models to models with long term dependence and regime switches including the relatively recent class of so called multifractal models we provide a comparative application of these models to carbon dioxide emission allowance prices from the european union emission trading scheme and evaluate their performance with up to date model comparison tests based on out of sample forecasts of future volatility and value at risk

modeling persistence of carbon emission allowance prices this study reexamines the issue of persistence in carbon emission allowance spot prices using daily data and covering the period from 28 2 2007 to 14 05 2014 for this purpose we use techniques based on the concept of long memory accounting for structural breaks and non linearities in the data with both of these aspects potentially affecting the degree of persistence our results indicate that while there is no evidence of non linearity when allowing for structural breaks persistence of shocks to the carbon emission allowance is markedly reduced with the same being transitory in nature for recent sub samples

an empirical comparison of continuous time models of implied volatility indices abstract we explore the ability of alternative popular continuous time diffusion and jump diffusion processes to capture the dynamics of implied volatility indices over time the performance of the various models is assessed under both econometric and financial metrics to this end data are employed from major european and american implied volatility indices and the rapidly growing cboe volatility futures market we find that the addition of jumps is necessary to capture the evolution of implied volatility indices under both metrics mean reversion is of second order importance though the results are consistent across the various metrics markets and construction methodologies

modelling the price spread between eua and cer carbon prices abstract this paper identifies factors impacting on the dynamics of the price spread between european allowances euas and certified emission reductions cers by detecting changes in the structural relationship between them while prior studies have assumed a fixed structural relationship this paper analyses the dynamic evolution of the price spread by employing a time varying parameter analysis using daily data from march 2008 to september 2011 the analysis reveals that a lack of competitive conditions in markets access constraints on the use and the availability of cers regulatory changes regarding both euas and cers and uncertainty surrounding cers can explain a significant portion of the price spread

an international assessment of energy security performance energy security has in recent years grown as a salient policy and political issue to better understand energy security and sustainability concerns this study s main objective is to present an energy security index which measures national performance on energy security over time based on three years of research involving interviews surveys and an international workshop this study conceptualizes energy security as consisting of the interconnected factors of availability affordability efficiency sustainability and governance it then matches these factors with 20 metrics comprising an energy security index measuring international performance across 18 countries from 1990 to 2010 it offers three case studies of japan top performer laos middle performer and myanmar w orst performer to provide context to the index s results it then presents four conclusions first a majority of countries analyzed have regressed in terms of their energy security second despite the near total deterioration of energy security a great disparity exists between countries with some clear leaders such as japan third tradeoffs exist within different components of energy security fourth creating energy security is as much a matter of domestic policy from within as it is from foreign policy without

stock prices of clean energy firms oil and carbon markets a vector autoregressive analysis recent discussions of energy security and climate change have attracted significant attention to clean energy we hypothesize that rising prices of conventional energy and or placement of a price on carbon emissions would encourage investments in clean energy firms the data from three clean energy indices show that oil prices and technology stock prices separately affect the stock prices of clean energy firms however the data fail to demonstrate a significant relationship between carbon prices and the stock prices of the firms

integration of the global carbon markets abstract this paper analyzes the market architecture and common factors of emission reduction instruments in europe and north america spot and futures prices across exchanges in europe are cointegrated but the futures curve beyond the calendar year evolves independently despite narrower spreads political uncertainties about the clean development mechanism have kept eua and cer prices from converging rggi allowances share a common trend with eua and the european markets adjust to the u s price trend a 0 10 shock to rggi prices leads to a one month 0 64 cumulative increase in eua prices the introduction of cap and trade legislation in the u s has broken a cointegrating relationship in voluntary prices voluntary instruments that are convertible into mandatory allowances imply less than a 20 probability of price convergence between the u s and europe by 2013

the efficacy of the european union emissions trading scheme depicting the co movement of carbon assets and energy commodities through wavelet decomposition abstract environmental system thresholds have been crossed for a number of dimensions of global environmental pollution such as greenhouse gas emissions under this scenario institutions and corporations are required to implement sustainable policies as a condition for humanity staying within planetary boundaries accordingly the european union created the largest emissions trading scheme in the world with the aim of properly managing corporations carbon dioxide reductions this paper aims to contribute to the literature focused on testing the effectiveness of institutional environmental management policies specifically this research evaluates whether the objectives of the european union emissions trading scheme are partially achieved by analyzing the dynamics of carbon assets and the main energy commodities worldwide this paper provides relevant information both for policy makers and company managers so that contributions towards the common goal of developing a clean energy future and curbing climate change are ameliorated based on wavelet coherence analysis this paper proposes a model free way of estimating the time varying correlations between carbon assets and energy commodities at both high and low frequencies our central results reveal that carbon assets and energy commodities present a changing lead lag behavior at different frequencies the energy commodities lead the european union allowances returns at medium frequencies but the contrary was true for the highest investment horizons this finding should be in line with the goal of significantly reducing emissions because during long cycles if the majority of companies have not switched to cleaner industrial processes they must buy more carbon assets increasing their prices in that case energy commodities would be more expensive because of the energy commodities market behavior during long term horizons with european union allowances lead the certified emissions reductions lead in a negative way most of the energy commodities at medium frequencies thus indicating that investors handling energy commodities oriented portfolios could incorporate the mentioned carbon assets for diversification purposes these specific findings suggest that polluting activities would be more expensive which would provide an incentive to companies to implement environmentally friendly industrial processes the european union emissions trading scheme can result in significant emission reductions and compliance of the european union with the objectives of the kyoto protocol

hedging volatility risk abstract volatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets this risk is currently managed by volatility swaps or futures however this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset the objective of this paper is to introduce a new volatility instrument an option on a straddle which can be used to hedge volatility risk the design and valuation of such an instrument are the basic ingredients of a successful financial product in order to value these options we combine the approaches of compound options and stochastic volatility our numerical results show that the straddle option is a powerful instrument to hedge volatility risk an additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk

the forecasting accuracy of implied volatility from ecx carbon options abstract this study analyzes the forecasting accuracy of the implied volatility of options on futures contracts for the delivery of co 2 emission allowances carbon options traded on the european climate exchange we demonstrate that option implied volatility is highly informative about the variance of returns realized over the remaining life of the options it is also directionally accurate in predicting future volatility changes however we also find that implied volatility of carbon options is biased especially for periods of time which do not coincide with the remaining life of the option this suggests that the market has yet to fully mature

dynamic behavior of co2 spot prices co2 emission allowances are traded nowadays over the counter otc and on exchanges across the european union eu it thus becomes increasingly important for traders of these emission certificates to have a valid co2 spot price model to value potential derivatives in addition co2 emitting companies require an adequate co2 spot price model in order to better assess their production costs and support emissions related investment decisions however sufficient price history is still lacking for the european union emission trading scheme eu ets we therefore present a tractable stochastic equilibrium model reflecting stylized features of the eu ets and analyze the resulting co2 spot price dynamics our main findings are that co2 prices do not have to follow any seasonal patterns discounted prices should possess the martingale property and an adequate co2 price process should exhibit a time and price dependent volatility structure a brief empirical examination regarding market efficiency complements our analysis