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Pricing of carbon emission allowances An assessment of the pricing relationships and the adequacy of EU ETS as a climate policy tool

Lie, Sander; Huse, Joachim Aalberg
Master thesis
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MatlabCode.pdf (272.3Kb)
Spot+DecFutures.xlsx (694.5Kb)
URI
https://hdl.handle.net/11250/2687436
Date
2020
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  • Master of Science [963]
Abstract
The purpose of this study is to shed light on the pricing mechanisms within the

EU Emissions Trading System and evaluate the link between the prices of emission

allowances and the prices of fundamental drivers of greenhouse gas emission.

Through the use of an extensive model framework, we prove that there exists a

long-run relationship between the spot and futures prices of emission allowances

and make relatively accurate predictions of future spot prices based on historical

price information. This implies that futures prices work as a signi cant information

vehicle and that the system exhibits the appropriate risk mitigation characteristics

for hedging greenhouse gas emission. Moreover, we identify links between prices of

emission allowances and prices of coal, Brent oil and the DAX. Impulse response

functions indicate that the system reacts to shocks in these variables but that the

shocks are neutralized relatively fast. Overall, we nd evidence of a system exhibiting

the characteristics of a mature nancial market
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2020
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Handelshøyskolen BI

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