Convenience yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period

Stefan Trück and Rafał Weron
Authors registered in the RePEc Author Service: Stefan Trueck ()

No HSC/15/03, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Science and Technology

Abstract: We examine convenience yields in the EU-wide CO2 emissions trading scheme (EU-ETS) during the first Kyoto commitment period (2008-2012). We find that the market has changed from initial backwardation to contango with significantly negative convenience yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking as well as returns, variance or skewness in the EU-ETS spot market. Our findings suggest that the drop in risk-free rates during and after the financial crisis has impacted on the deviation from the cost-of-carry relationship for Kyoto commitment emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between convenience yields and the increasing level of inventory during the first Kyoto commitment period providing an explanation for the high negative convenience yields during Phase II. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices.

Keywords: CO2 Emissions Trading; Commodity Markets; Spot and Futures Prices; Convenience Yields (search for similar items in EconPapers)
JEL-codes: G10 G13 Q21 Q28 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Futures Markets (doi: 10.1002/fut.21780).

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Journal Article: Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period (2016)
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