 Valuation of carbon emission allowance options under an open trading phaseMingyu Fang, Ken Seng Tan and Tony S. Wirjanto Energy Economics, 2024, vol. 131, issue C Abstract: This paper presents valuation models of emission allowance options under an emission trading scheme, operating in an open trading phase, where unused allowances are banked to subsequent phases without any limit. Empirical studies are carried out to show that allowance option prices exhibit similar volatility smiles to those of the stock market. Three reduced-form econometrics models, namely a Lognormal allowance price model, a Skewness–Kurtosis-Modified Lognormal allowance price model, and a Mixture Lognormal allowance price model are introduced, with each being accorded with a rich interpretation of its own. Numerical illustration of the models is performed through calibration to the European-Union Emission-Trading-Scheme’s allowance futures option prices collected for EU ETS Phase 3 and Phase 4 respectively, where statistical fitness of the models is assessed comparatively within each sample and across the two samples collected to ensure robustness of the conclusions. Keywords: Climate change; Carbon emission allowances; Emission derivatives; Carbon pricing; Sustainable finance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:131:y:2024:i:c:s0140988324000598 DOI: 10.1016/j.eneco.2024.107351 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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