Futures Price Dynamics of CO2 Emission Certificates - An Empirical Analysis
31 Pages Posted: 1 Nov 2006 Last revised: 17 Feb 2014
Date Written: 2009
CO2 emission certificates are traded with increasing liquidity within the EU emissions trading scheme. Besides spot certificates, forwards and futures are also currently available OTC and on exchanges across Europe. The focus of this study is on the relationship between spot and futures markets in the EU ETS. A thorough empirical examination reveals evidence that spot and futures prices are linked by the cost-of-carry approach. After an initial period of market inefficiency, spot prices now seem to equal discounted futures prices within a trading period, which has implications for the pricing of derivative instruments on emission certificates. Moreover, we find that futures markets lead the price discovery process of CO2 emission certificates.
Keywords: CO2 emission certificates, price dynamics, CO2 forwards
JEL Classification: Q28, Q50, G13
Suggested Citation: Suggested Citation