The Role of Hedging in Carbon Markets
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.
|Date of creation:||2013|
|Contact details of provider:|| Postal: Mohrenstraße 58, D-10117 Berlin|
Web page: http://www.diw.de/en
More information through EDIRC
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.:
- 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.
- Paolo, COLLA & Marc, GERMAIN & Vincent, VAN STEENBERGHE, 2005.
"Environmental policy and speculation on markets for emission permits,"
Discussion Papers (ECON - Département des Sciences Economiques)
2005049, Université catholique de Louvain, Département des Sciences Economiques.
- PAOLO COLLA & MARC GERMAIN & VINCENT Van STEENBERGHE, 2012. "Environmental Policy and Speculation on Markets for Emission Permits," Economica, London School of Economics and Political Science, vol. 79(313), pages 152-182, 01.
- 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).
- 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.
- 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.
- 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.
- Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
- Julien Chevallier, 2009.
"Energy Risk Management with Carbon Assets,"
- 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.
- 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.
- repec:dau:papers:123456789/4206 is not listed on IDEAS
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Bailey,Roy E., 2005. "The Economics of Financial Markets," Cambridge Books, Cambridge University Press, number 9780521612807, May.
- 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).
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 references are entirely missing, you can add them using this form.