Explaining the EUA-CER Spread

30 Pages Posted: 13 Apr 2016

See all articles by Marc Gronwald

Marc Gronwald

University of Aberdeen; CESifo (Center for Economic Studies and Ifo Institute)

Beat Hintermann

University of Maryland - Department of Agricultural & Resource Economics

Date Written: March 3, 2016

Abstract

Because of a link between the EU ETS and the Kyoto Flexible Mechanisms, the emission certificates traded on these markets are in principle interchangeable assets; despite of this, a persistent price difference exists. We explain this price spread using a theoretical model that combines three features: A binding limit for the use of Kyoto offsets within the EU ETS; a disconnect between the price of offsets and their marginal cost of production due to institutional reasons; and uncertainty about future supply and demand of offsets. Our model expresses the offset price as an average of the EUA price and an offset’s outside value, weighted by the probability of a binding import limit. Using a detailed dataset on expected offset supply and demand, we provide empirical support for our theory of offset price formation. In addition, we find evidence for informational frictions governing the use of offsets within the EU ETS.

Keywords: EU ETS, clean development mechanism, offset demand, EUA-CER spread

JEL Classification: Q02, Q54, Q58

Suggested Citation

Gronwald, Marc and Hintermann, Beat, Explaining the EUA-CER Spread (March 3, 2016). CESifo Working Paper Series No. 5795, Available at SSRN: https://ssrn.com/abstract=2763503 or http://dx.doi.org/10.2139/ssrn.2763503

Marc Gronwald (Contact Author)

University of Aberdeen ( email )

Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Beat Hintermann

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

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