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Convenience Yields for CO2 Emission Allowance Futures Contracts

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

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.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-076.

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Length: 30 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-076
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  11. 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.
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  14. 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.
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