Abstract
New regulatory frameworks designed to comply with the Kyoto protocol have been developed with the aim of decreasing global greenhouse gas emissions over both short and long time periods. Incentives must be established to encourage the transition to a clean energy economy. Emissions taxes represent a “price” incentive for this transition, but economists agree this approach is suboptimal. Instead, the “quantity” instrument provided by cap-and-trade markets are superior from an economic point of view. This chapter summarizes the current state of world cap-and-trade schemes as well as recent literature devoted to quantitative pricing and hedging tools for these markets.
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- 1.
Industrialized countries: Australia, Austria, Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, United States of America.
- 2.
The first trading started in 2004 in anticipation of the formal initiation of the scheme in January 2005. The traded volume was about 8.5 MtCO2.
- 3.
An important component of each plan is a quantity set aside for new installations and new companies, known as the New Entrants' Reserve.
- 4.
Penalty is set at € 40 per metric ton of carbon equivalent above the cap in 2005–2007 period and € 100 for the phase 2008–2012.
- 5.
A very limited number of EUAs were auctioned during the first phase. Referring to Article 10 of the European Directives, auctioning will increase to 10% of total emissions in phase II (2008–2012).
- 6.
NYSE Euronext acquired Powernext Carbon in December 2007.
- 7.
Nord Pool was sold entirely to NASDAQ OMX to create the NASDAQ OMX Commodities.
- 8.
They studied the models AR(p), p ≥ 1, and they found only AR(1) is significant.
- 9.
European policy makers are studying the possibility of imposing carbon taxes on goods imported from foreign countries which do not penalize emissions. Companies not exposed to foreign competition (e.g. in the electricity sector) will presumably pass the additional marginal cost to the final consumer.
- 10.
It can take positive values and be considered a gain when the company decides to sell allowances at the initial time, or negative and seen as a cost if allowances are purchased.
- 11.
The discount rate is the weighted average cost of capital.
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© 2011 Springer-Verlag Berlin Heidelberg
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Mnif, W., Davison, M. (2011). Carbon Emission Markets. In: Wu, D. (eds) Quantitative Financial Risk Management. Computational Risk Management, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-19339-2_11
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DOI: https://doi.org/10.1007/978-3-642-19339-2_11
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