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