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The Clean Development Mechanism and Joint Price Formation for Allowances and CERs

  • René CarmonaEmail author
  • Max Fehr
Conference paper
Part of the Progress in Probability book series (PRPR, volume 63)

Abstract

The goal of this paper is to propose an equilibrium model for the joint price formation of allowances issued by regulators in the framework of a cap-and-trade scheme and offset certificates such as CERs generated within the framework of the Clean Development Mechanism (CDM) or the Joint Implemenation (JI) of the Kyoto Protocol. Thereby we consider a system of cap-and-trade schemes, such as, e.g., the EUETS and a possible American Market (USETS) or Japan ETS, which are linked indirectly by the Clean Development Mechanism and for which banking is allowed. Besides deriving equilibrium price formulas for the joint price dynamics of these linked markets, the main thrust of the paper is to explain the spreads between European emission allowances EUAs and CERs as observed historically.

Keywords

Environmental risk energy economics cap-and-trade carbon markets Kyoto protocol 

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Copyright information

© Springer Basel AG 2011

Authors and Affiliations

  1. 1.Department of Operations Research and Financial EngineeringPrinceton UniversityPrincetonUSA
  2. 2.Centre for the Analysis of Time SeriesLondon School of Economics and Political ScienceLondonUSA

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