Dynamic Behavior of CO2 Spot Prices

Journal of Environmental Economics and Management, Vol. 56, No. 2, pp. 180-194, September 2008

Posted: 5 Mar 2008 Last revised: 17 Feb 2014

See all articles by Jan Seifert

Jan Seifert

University of Karlsruhe (TH)

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Michael Wolfgang Wagner

University of Karlsruhe (TH)

Date Written: November 1, 2007

Abstract

CO2 emission allowances are traded nowadays OTC and on exchanges across Europe. It thus becomes increasingly important for traders of these emission certificates to have a valid CO2 spot price model to value potential derivatives. In addition, CO2 emitting companies require an adequate CO2 spot price model in order to better assess their production costs and support emissions-related investment decisions. However, sufficient price history is still lacking for the EU emissions trading scheme (EU ETS). We therefore present a tractable stochastic equilibrium model reflecting stylized features of the EU ETS and analyze the resulting CO2 spot price dynamics. Our main findings are that CO2 prices do not have to follow any seasonal patterns, discounted prices should possess the martingale property, and an adequate CO2 price process should exhibit a time- and price-dependent volatility structure. A brief empirical examination regarding market efficiency complements our analysis.

Keywords: CO2 emission certificates, emissions trading, spot price process, stochastic optimal control

JEL Classification: Q29, G19

Suggested Citation

Seifert, Jan and Uhrig-Homburg, Marliese and Wagner, Michael Wolfgang, Dynamic Behavior of CO2 Spot Prices (November 1, 2007). Journal of Environmental Economics and Management, Vol. 56, No. 2, pp. 180-194, September 2008, Available at SSRN: https://ssrn.com/abstract=903289

Jan Seifert

University of Karlsruhe (TH) ( email )

Financial Engineering and Derivatives
D-76128 Karlsruhe
Germany
+49 721 608 8187 (Phone)
+49 721 608 8190 (Fax)

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Michael Wolfgang Wagner (Contact Author)

University of Karlsruhe (TH) ( email )

Postbox
76128 Karlsruhe, DE 76128
Germany

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