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Convenience Yields for CO2 Emission Allowance Futures Contracts

Szymon Borak, Wolfgang Härdle (), Stefan Trück and Rafał Weron ()
Authors registered in the RePEc Author Service: Stefan Trueck ()

No SFB649DP2006-076, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation. Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of convenience yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant convenience yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the yields can be explained by the price level and volatility of the spot prices. We conclude that the yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.

Keywords: CO2 Emission Trading; Commodity Markets; Spot and Futures Prices; Convenience Yields. (search for similar items in EconPapers)
JEL-codes: Q28 G13 C19 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ene and nep-env
Date: 2006-11
References: View references in EconPapers View complete reference list from CitEc
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