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Convenience yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period

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  • Stefan Trück
  • Rafal Weron

Abstract

We examine convenience yields in the EU-wide CO2 emissions trading scheme (EU-ETS) during the first Kyoto commitment period (2008-2012). We find that the market has changed from initial backwardation to contango with significantly negative convenience yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking as well as returns, variance or skewness in the EU-ETS spot market. Our findings suggest that the drop in risk-free rates during and after the financial crisis has impacted on the deviation from the cost-of-carry relationship for Kyoto commitment emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between convenience yields and the increasing level of inventory during the first Kyoto commitment period providing an explanation for the high negative convenience yields during Phase II. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices.

Suggested Citation

  • Stefan Trück & Rafal Weron, 2015. "Convenience yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period," HSC Research Reports HSC/15/03, Hugo Steinhaus Center, Wroclaw University of Technology.
  • Handle: RePEc:wuu:wpaper:hsc1503
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    References listed on IDEAS

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    Cited by:

    1. Martínez, Beatriz & Torró, Hipòlit, 2018. "Hedging spark spread risk with futures," Energy Policy, Elsevier, vol. 113(C), pages 731-746.
    2. Fan, Ying & Jia, Jun-Jun & Wang, Xin & Xu, Jin-Hua, 2017. "What policy adjustments in the EU ETS truly affected the carbon prices?," Energy Policy, Elsevier, vol. 103(C), pages 145-164.
    3. Reckling, Dennis, 2016. "Variance risk premia in CO2 markets: A political perspective," Energy Policy, Elsevier, vol. 94(C), pages 345-354.

    More about this item

    Keywords

    CO2 Emissions Trading; Commodity Markets; Spot and Futures Prices; Convenience Yields;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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