A Classification Study of Carbon Assets into Commodities

22 Pages Posted: 25 Jan 2009

See all articles by Takashi Kanamura

Takashi Kanamura

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS)

Date Written: January 24, 2009

Abstract

This paper explores the classification of carbon assets generally considered as commodities by examining the characteristics of carbon prices. We propose a carbon price model reflecting the characteristics of the prices. The empirical studies using EUA (EU allowance) futures prices traded on the European Climate Exchange show that convenience yield of EUAs violates the property of commodities in terms of negative correlations between convenience yields of EUAs and EUA prices. It corresponds to the characteristics of the model we propose. Next, we examine mean reversion and seasonality of EUA futures prices often observed in commodity markets using AR(1) model with an annual sinusoidal trend. We show that EUA price analyses reject the existence of mean reversion and seasonality. We also examine the conditional correlations between EUA different delivery futures prices, resulting in almost positive correlations which may hold the same shape of the term structure as contango. In addition, the empirical studies using EUA option prices traded on the ECX show that carbon prices behave unlike commodities but like securities in terms of volatility smile. These empirical studies may support the counter argument to the classification of carbon assets into commodities.

Keywords: Carbon markets, EU-ETS, futures prices, convenience yield, commodities, mean reversion, seasonality, dynamic conditional correlation, volatility smile

JEL Classification: C51, G13, Q56

Suggested Citation

Kanamura, Takashi, A Classification Study of Carbon Assets into Commodities (January 24, 2009). Available at SSRN: https://ssrn.com/abstract=1332267 or http://dx.doi.org/10.2139/ssrn.1332267

Takashi Kanamura (Contact Author)

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS) ( email )

1, Yoshida-Nakaadachi-cho, Sakyo-ku,
Kyoto, 606-8306
Japan
81-75-762-2004 (Phone)
81-75-762-2004 (Fax)

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