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Dynamic behavior of CO2 spot prices

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  • Seifert, Jan
  • Uhrig-Homburg, Marliese
  • Wagner, Michael

Abstract

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.

Suggested Citation

  • Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
  • Handle: RePEc:eee:jeeman:v:56:y:2008:i:2:p:180-194
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    References listed on IDEAS

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    1. Svendsen, Gert Tinggaard & Vesterdal, Morten, 2002. "CO2 trade and market power in the EU electricity sector," Working Papers 02-11, University of Aarhus, Aarhus School of Business, Department of Economics.
    2. Godby, Robert W. & Mestelman, Stuart & Muller, R. Andrew & Welland, J. Douglas, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain," Journal of Environmental Economics and Management, Elsevier, vol. 32(3), pages 359-381, March.
    3. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    4. 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.
    5. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-685, September.
    6. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-189, March.
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