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Integrated EUA and CER price modeling and application for spread option pricing

Barrieu, Pauline and Fehr, Max (2011) Integrated EUA and CER price modeling and application for spread option pricing. Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment working papers, 40. Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment, London, UK.

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Abstract

In this paper we propose a market consistent futures price dynamics model for cap-andtrade schemes, designed in the spirit of the European Union’s Emissions Trading Scheme (EU ETS). Historical price dynamics for the EU ETS suggest that, both, European emission Allowances (EUAs) and Certified Emission Reductions (CERs), certificates, which are generated through the Clean Development Mechanism (CDM) - a non-domestic offset mechanism - are significantly related. We use an equilibrium framework to demonstrate that compliance regulation singles out special joint futures price dynamics. Based on this result we propose an arbitrage free futures price model and apply it to the pricing of spread options between EUAs and CERs.

Item Type: Monograph (Working Paper)
Official URL: http://www2.lse.ac.uk/GranthamInstitute/Home.aspx
Additional Information: © 2011 The Authors
Library of Congress subject classification: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounting; Environmental Equity
Sets: Departments > Statistics
Collections > Economists Online
Research centres and groups > Centre for the Analysis of Time Series (CATS)
Research centres and groups > Risk and Stochastics Group
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 40
Date Deposited: 25 Jul 2011 13:29
URL: http://eprints.lse.ac.uk/37576/

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