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Convenience Yields for CO2 Emission Allowance Futures Contracts

Author

Listed:
  • Szymon Borak
  • Wolfgang Härdle
  • Stefan Trück
  • Rafal Weron

Abstract

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.

Suggested Citation

  • Szymon Borak & Wolfgang Härdle & Stefan Trück & Rafal Weron, 2006. "Convenience Yields for CO2 Emission Allowance Futures Contracts," SFB 649 Discussion Papers SFB649DP2006-076, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2006-076
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    References listed on IDEAS

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    More about this item

    Keywords

    CO2 Emission Trading; Commodity Markets; Spot and Futures Prices; Convenience Yields.;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other

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