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Variance risk premia in CO2 markets: A political perspective

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  • Reckling, Dennis

Abstract

The European Commission discusses the change of free allocation plans to guarantee a stable market equilibrium. Selling over-allocated contracts effectively depreciates prices and negates the effect intended by the regulator to establish a stable price mechanism for CO2 assets. Our paper investigates mispricing and allocation issues by quantitatively analyzing variance risk premia of CO2 markets over the course of changing regimes (Phase I-III) for three different assets (European Union Allowances, Certified Emissions Reductions and European Reduction Units). The research paper gives recommendations to regulatory bodies in order to most effectively cap the overall carbon dioxide emissions.

Suggested Citation

  • Reckling, Dennis, 2016. "Variance risk premia in CO2 markets: A political perspective," Energy Policy, Elsevier, vol. 94(C), pages 345-354.
    • Handle: RePEc:eee:enepol:v:94:y:2016:i:c:p:345-354
    DOI: 10.1016/j.enpol.2016.04.024
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    Cited by:

    1. Cretí, Anna & Joëts, Marc, 2017. "Multiple bubbles in the European Union Emission Trading Scheme," Energy Policy, Elsevier, vol. 107(C), pages 119-130.
    2. João Leitão & Joaquim Ferreira, 2021. "Dynamic Effects of Material Production and Environmental Sustainability on Economic Vitality Indicators: A Panel VAR Approach," JRFM, MDPI, vol. 14(2), pages 1-20, February.

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    More about this item

    Keywords

    Cap-and-trade; Variance risk premia; Emission reduction; ETS; Kyoto Protocol; Carbon price; Price collar;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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