Chesney, Marc and Taschini, Luca 
ORCID: 0000-0001-5355-1736
(2012)
The endogenous price dynamics of emission allowances and an application to CO2 option pricing.
Applied Mathematical Finance, 19 (5).
pp. 447-475.
ISSN 1350-486X
Abstract
Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and the European Emission Trading Scheme is an example. By means of dynamic optimization in the contest of firms covered by such environmental regulations, this article generates endogenously the price dynamics of emission permits under asymmetric information, allowing inter-temporal banking and borrowing. In the market, there are a finite number of firms and each firm's pollution emission follows an exogenously given stochastic process. We prove the discounted permit price is a martingale with respect to the relevant filtration. The model is solved numerically. Finally, a closed-form pricing formula for European-style options is derived.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.tandfonline.com/loi/ramf20 |
| Additional Information: | © 2012 Taylor & Francis |
| Divisions: | Grantham Research Institute |
| Subjects: | G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HB Economic Theory |
| JEL classification: | Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling |
| Date Deposited: | 08 Oct 2012 14:15 |
| Last Modified: | 02 Oct 2024 06:48 |
| URI: | http://eprints.lse.ac.uk/id/eprint/46668 |
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