Advanced Search
MyIDEAS: Login

The Role of Hedging in Carbon Markets

Contents:

Author Info

  • Anne Schopp
  • Karsten Neuhoff

Abstract

In the European Emissions Trading System, power generators hold CO2 allowances to hedge for future power sales. First, we model their aggregate hedging demand in response to changes in expectations of future fuel, carbon and power prices from forward prices. This partial equilibrium analysis is then integrated into a two period model of the supply and demand of CO2 allowances considering also emissions impact and banking of allowances by speculative investors. We find that hedging flexibility can balance a CO2 allowance surplus in the range of 1.1 - 1.6 billion t CO2 at discount rates of future carbon allowances between 0 - 10%. If the surplus exceeds this level, then the rate at which today's carbon prices discount expected future prices increases. This points to the value of reducing the surplus estimated to be 2.6 billion t CO2 allowances in 2015 by about 1.3 billion t CO2, thus ensuring that hedging makes a significant contribution to stabilise carbon prices.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.416987.de/dp1271.pdf
Download Restriction: no

Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1271.

as in new window
Length: 24 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1271

Contact details of provider:
Postal: Mohrenstraße 58, D-10117 Berlin
Phone: xx49-30-89789-0
Fax: xx49-30-89789-200
Email:
Web page: http://www.diw.de/en
More information through EDIRC

Related research

Keywords: Emissions trading schemes; banking; power hedging; discount rates;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Malik, Arun S., 2002. "Further Results on Permit Markets with Market Power and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 371-390, November.
  2. COLLA, Paolo & GERMAIN, Marc & VAN STEENBERGHE, Vincent, 2005. "Environmental policy and speculation on markets for emission permits," CORE Discussion Papers 2005066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Bailey,Roy E., 2005. "The Economics of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521612807, November.
  4. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
  5. Fell, Harrison & Moore, Eric & Morgenstern, Richard D., 2011. "Cost Containment under Cap and Trade: A Review of the Literature," International Review of Environmental and Resource Economics, now publishers, vol. 5(4), pages 285-307, September.
  6. Julien Chevallier, 2009. "Energy risk management with carbon assets," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 32(4), pages 328-349.
  7. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  8. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
  9. Nelson, Tim & Kelley, Simon & Orton, Fiona, 2012. "A literature review of economic studies on carbon pricing and Australian wholesale electricity markets," Energy Policy, Elsevier, vol. 49(C), pages 217-224.
  10. Makoto Tanaka and Yihsu Chen, 2012. "Emissions Trading in Forward and Spot Markets for Electricity," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
  11. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  12. Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, vol. 37(12), pages 5192-5207, December.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Backloading – An ineffective economic measure for a good political reason?
    by ? in Bruegel blog on 2013-06-19 08:01:07

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1271. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.