The EUA-sCER Spread: Compliance Strategies and Arbitrage in the European Carbon Market

Mission Climat Working Paper No. 2010-6

40 Pages Posted: 24 Jan 2010

See all articles by Maria Mansanet Bataller

Maria Mansanet Bataller

University of Valencia - Faculty of Economics

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis

Morgan Hervé-Mignucci

Université Paris Dauphine

Emilie Alberola

Université Paris X Nanterre

Date Written: January 22, 2010

Abstract

This article studies the price relationships between EU emissions allowances (EUAs) – valid under the EU Emissions Trading Scheme (EU ETS) – and secondary Certified Emissions Reductions (sCERs) – established from primary CERs generated through the Kyoto Protocol’s Clean Development Mechanism (CDM). Given the price differences between EUAs and sCERs, financial and industrial operators may benefit from arbitrage strategies by buying sCERs and selling EUAs (i.e. selling the EUA-sCER spread) to cover their compliance position between these two assets, as industrial operators are allowed to use sCERs towards compliance with their emissions cap within the European system up to 13.4%. Our central results show that the spread is mainly driven by EUA prices and market microstructure variables and less importantly, as we would expect, by emissions-related fundamental drivers. This might be justified by the fact that the EU ETS remains the greatest source of CER demand to date.

Keywords: EUA-sCER Spread, Arbitrage, Emissions Markets

Suggested Citation

Mansanet Bataller, Maria and Chevallier, Julien and Hervé-Mignucci, Morgan and Alberola, Emilie, The EUA-sCER Spread: Compliance Strategies and Arbitrage in the European Carbon Market (January 22, 2010). Mission Climat Working Paper No. 2010-6, Available at SSRN: https://ssrn.com/abstract=1540599 or http://dx.doi.org/10.2139/ssrn.1540599

Maria Mansanet Bataller (Contact Author)

University of Valencia - Faculty of Economics ( email )

Valencia, E-46022
Spain

Julien Chevallier

University of Paris 8 Vincennes-Saint Denis ( email )

Paris
France

Morgan Hervé-Mignucci

Université Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Emilie Alberola

Université Paris X Nanterre ( email )

92, av. de la République, Nanterre
Room G301, Building G
Paris, Nanterre Cedex 92001
France

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