Integrated EUA and CER price modeling and application for spread option pricing

Pauline Barrieu and Max Fehr

No 40, GRI Working Papers from Grantham Research Institute on Climate Change and the Environment

Abstract: In this paper we propose a market consistent futures price dynamics model for cap-andtrade schemes, designed in the spirit of the European Union�s Emissions Trading Scheme(EU ETS). Historical price dynamics for the EU ETS suggest that, both, European emission Allowances (EUAs) and Certified Emission Reductions (CERs), certificates, which are generated through the Clean Development Mechanism (CDM) - a non-domestic offset mechanism - are significantly related. We use an equilibrium framework to demonstrate that compliance regulation singles out special joint futures price dynamics. Based on this esult we propose an arbitrage free futures price model and apply it to the pricing of spread options between EUAs and CERs.

Date: 2011-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.lse.ac.uk/GranthamInstitute/wp-content/ ... ing_Barrieu-etal.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lsg:lsgwps:wp40

Access Statistics for this paper

More papers in GRI Working Papers from Grantham Research Institute on Climate Change and the Environment Contact information at EDIRC.
Bibliographic data for series maintained by The GRI Administration ().