Convenience Yields for CO2 Emission Allowance Futures Contracts
In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation. Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of convenience yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant convenience yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the yields can be explained by the price level and volatility of the spot prices. We conclude that the yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.
|Date of creation:||Nov 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://sfb649.wiwi.hu-berlin.de
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.:
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Schleich, Joachim & Ehrhart, Karl-Martin & Hoppe, Christian & Seifert, Stefan, 2004.
"Banning banking in EU emissions trading?,"
Sonderforschungsbereich 504 Publications
04-60, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Nikolaos Milonas & Thomas Henker, 2001. "Price spread and convenience yield behaviour in the international oil market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 23-36.
- 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.
- Christoph Böhringer & Andreas Lange, 2005. "Economic Implications of Alternative Allocation Schemes for Emission Allowances," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 563-581, 09.
- Considine, Timothy J. & Larson, Donald F., 2001. "Uncertainty and the convenience yield in crude oil price backwardations," Energy Economics, Elsevier, vol. 23(5), pages 533-548, September.
- Chang, Eric C, 1985. " Returns to Speculators and the Theory of Normal Backwardation," Journal of Finance, American Finance Association, vol. 40(1), pages 193-208, March.
- Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
- Ellerman, A. Denny & Montero, Juan-Pablo, 1998. "The Declining Trend in Sulfur Dioxide Emissions: Implications for Allowance Prices," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 26-45, July.
- Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
- Chiou Wei, Song Zan & Zhu, Zhen, 2006. "Commodity convenience yield and risk premium determination: The case of the U.S. natural gas market," Energy Economics, Elsevier, vol. 28(4), pages 523-534, July.
- Rezek, Jon P., 1999. "Shadow Prices Of Sulfur Dioxide Allowance In Phase I Electric Utilities," 1999 Annual meeting, August 8-11, Nashville, TN 21638, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
- Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, 08.
When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2006-076. 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: (RDC-Team)
If references are entirely missing, you can add them using this form.