The Endogenous Price Dynamics of Emission Allowances and an Application to CO2 Option Pricing

Chesney, Marc; Taschini, Luca

doi:10.2139/ssrn.1090150

Cited by 54 publications

(67 citation statements)

References 23 publications

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“…Uhrig-Homburg and Wagner (2007) describe extensively derivative instruments in the EU carbon market based on qualitative surveys. Chesney and Taschini (2008) provide an application of CO 2 price dynamics modeling to option pricing. Chevallier et al (2009) provide a case-study of investors' changes in risk aversion around the 2006 compliance event using both futures and option prices.…”

Section: Introductionmentioning

confidence: 99%

Options introduction and volatility in the EU ETS

Chevallier

Pen

Sévi³

2011

Resource and Energy Economics

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Section: Introductionmentioning

confidence: 99%

Options introduction and volatility in the EU ETS

Chevallier

Pen

Sévi³

2011

Resource and Energy Economics

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“…Others have tried to explain the price path by means of financial theory (Ben; Cetin and Verschuere, 2009;Seifert et al, 2008), or options formulae (Chesney and Taschini, 2012;Hintermann, 2012). In this paper, I examine the empirical evidence for the possibility that large firms manipulated the allowance price upwards during the first two years of the phase.…”

Section: Market Backgroundmentioning

confidence: 99%

Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS

Hintermann

2015

Environ Resource Econ

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A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the dominant firm perceives market power in the permit market alone. I then examine the empirical evidence for price manipulation by the ten largest electricity firms during phase I of the EU ETS. I find that firms' excess allowance holdings are consistent with strategic price manipulation, and that they cannot be explained by price speculation or by precautionary purchases to insure against uncertain future emissions. My results suggest that market power is likely to be an empirically relevant concern during the early years of emission permit markets.JEL codes H23, H32; Q52, Q53, Q54, Q58.

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“…Assume that (A. [1][2][3][4] are in force and that φ = 1 [Λ,+∞) as in Section 3. Then, at any time t < T and for any p ∈ R d , the mapping R ∋ e ֒→ E 0,p,e t is an homeomorphism with probability 1, and with non-zero probability, it is not a homeomorphism at time t = T .…”

Section: Absolute Continuity Before Terminal Time Tmentioning

confidence: 99%

“…Motivated by the analysis of mathematical models of the CO 2 emissions markets, see for example [3,18,2,4, 1], we are interested in the case of forward processes (X t = (P t , E t )) 0≤t≤T having a onedimensional component (E t ) 0≤t≤T with bounded variations, and a backward component (Y t ) 0≤t≤T having a terminal value given by a monotone function φ of E T , and especially when φ is an indicator function of the form φ = 1 [Λ,+∞) . In [1], we proposed an unrealistic toy example for which we showed that, while the terminal condition could not be enforced, it was still possible to prove existence and uniqueness of a solution provided parts of the terminal condition are allowed to become part of the solution.…”

Section: Introductionmentioning

confidence: 99%

“…See for example [3,18,2,4] for mathematical models of these markets. As exemplified in [1], the components of the stochastic process P can be viewed as the prices of the goods whose production is the source of the emissions, for example electricity, E as the cumulative emissions of the producers, and Y as the price of an emission allowance typically representing one ton of CO 2 equivalent.…”

Section: Introductionmentioning

confidence: 99%

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Singular FBSDEs and scalar conservation laws driven by diffusion processes

Carmona

Delarue²

2012

Probab. Theory Relat. Fields

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ABSTRACT. Motivated by earlier work on the use of fully-coupled Forward-Backward Stochastic Differential Equations (henceforth FBSDEs) in the analysis of mathematical models for the CO2 emissions markets, the present study is concerned with the analysis of these equations when the generator of the forward equation has a conservative degenerate structure and the terminal condition of the backward equation is a non-smooth function of the terminal value of the forward component. We show that a general form of existence and uniqueness result still holds. When the function giving the terminal condition is binary, we also show that the flow property of the forward component of the solution can fail at the terminal time. In particular, we prove that a Dirac point mass appears in its distribution, exactly at the location of the jump of the binary function giving the terminal condition. We provide a detailed analysis of the breakdown of the Markovian representation of the solution at the terminal time.

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The Endogenous Price Dynamics of Emission Allowances and an Application to CO2 Option Pricing

Cited by 54 publications

References 23 publications

Options introduction and volatility in the EU ETS

Options introduction and volatility in the EU ETS

Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS

Singular FBSDEs and scalar conservation laws driven by diffusion processes

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