Linking with Uncertainty: The Relationship Between EU ETS Pollution Permits and Kyoto Offsets
Beat Hintermann () and
Marc Gronwald ()
Additional contact information
Beat Hintermann: University of Basel
Marc Gronwald: University of Aberdeen Business School
Environmental & Resource Economics, 2019, vol. 74, issue 2, 761-784
Abstract Carbon offsets from the Kyoto Flexible Mechanisms can be used by firms in the EU Emissions Trading Scheme for compliance in lieu of EU allowances, making these carbon assets interchangeable. We offer an explanation of the price spread using a structural model of the price for Certified Emissions Reductions that combines three features: a limit for the use of Kyoto offsets within the EU ETS; a disconnect between the current price of offsets and their marginal cost of production for institutional reasons; and uncertainty about future supply and demand of offsets. Our model expresses the offset price as an average of the EU allowance price and an offset’s outside value, weighted by the probability of a binding import limit. Using a monthly series of the United Nation’s Clean Development Mechanism and Joint Implementation about offset supply and demand, we provide empirical support for our theory of offset price formation. Counterfactual simulations suggest that the price process is dominated by uncertainty.
Keywords: Emissions trading; Climate change; EU ETS; Kyoto; Linking (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s10640-019-00346-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:enreec:v:74:y:2019:i:2:d:10.1007_s10640-019-00346-7
Ordering information: This journal article can be ordered from
http://www.springer. ... al/journal/10640/PS2
Access Statistics for this article
Environmental & Resource Economics is currently edited by Ian J. Bateman
More articles in Environmental & Resource Economics from Springer, European Association of Environmental and Resource Economists Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla ().