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Integrated EUA and CER price modeling and application for spread option pricing

  • Pauline Barrieu
  • Max Fehr
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    In this paper we propose a market consistent futures price dynamics model for cap-andtrade schemes, designed in the spirit of the European Union�s Emissions Trading Scheme(EU ETS). Historical price dynamics for the EU ETS suggest that, both, European emission Allowances (EUAs) and Certified Emission Reductions (CERs), certificates, which are generated through the Clean Development Mechanism (CDM) - a non-domestic offset mechanism - are significantly related. We use an equilibrium framework to demonstrate that compliance regulation singles out special joint futures price dynamics. Based on this esult we propose an arbitrage free futures price model and apply it to the pricing of spread options between EUAs and CERs.

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    File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/eua-cer-price-modelling_Barrieu-etal.pdf
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    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 40.

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    Date of creation: Mar 2011
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    Handle: RePEc:lsg:lsgwps:wp40
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    1. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
    2. 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.
    3. Carmona, René & Fehr, Max & Hinz, Juri & Porchet, Arnaud, 2010. "Market Design for Emission Trading Schemes," Economics Papers from University Paris Dauphine 123456789/2267, Paris Dauphine University.
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