Quantitative Environmental Finance Network on Quantitative Methods applied to Environmental Issues

Emission Allowance Prices and Derivatives: Evidence from the European Trading Scheme

by Daskalakis, George, Psychoyios, Dimitris and Markellos, Raphael N.

- This paper studies the three main markets for emission allowances within the European Union Emissions Trading Scheme (EU ETS): Powernext, Nord Pool and European Climate Exchange (ECX). The analysis suggests that the prohibition of banking of emission allowances between distinct phases of the EU ETS has significant implications in terms of futures pricing. Motivated by these findings, we develop an empirically and theoretically valid framework for the pricing and hedging of intra-phase and inter-phase futures and options on futures, respectively.

Daskalakis, George, Psychoyios, Dimitris and Markellos, Raphael (2008) "Modeling CO2 Emission Allowance Prices and Derivatives: Evidence from the European Trading Scheme" Journal of Banking and Finance - 2008. 

Are Electricity Risk Premia Affected by Emission Allowance Prices? Evidence from the EEX, Nord Pool and Powernext

by Daskalakis, George and Markellos, Raphael 

- The links between emission and energy markets are of great interest to practitioners, academics and policy makers. In this paper, it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the European Union Emissions Trading Scheme (EU ETS). We discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets. We also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances. Analysis of data from three major markets, the EEX, Nord Pool and Powernext, offers empirical support to our conjecture. These findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the EU ETS regulative framework and design over the next years. Moreover, our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants.

Daskalakis, George and Markellos, Raphael N (2009) "Are Electricity Risk Premia Affected by Emission Allowance Prices? Evidence from the EEX, Nord Pool and Powernext." Energy Policy, Forthcoming

Are the European Carbon Markets Efficient?

by Daskalakis, George and Markellos, Raphael

- This paper examines the efficiency of the European market for carbon dioxide emission allowances. To this end, spot and futures market data are analyzed from Powernext, Nord Pool and ECX, the three main exchanges under the European Union Emission Trading Scheme (EU ETS). The methodology employs econometric testing procedures and trading strategies based on technical analysis rules and na¿ve forecasts. The empirical results suggest that the behavior of the markets under consideration is not consistent with weak form efficiency. It is argued that this could be due to the immaturity of the EU ETS and to the restrictions imposed on short-selling and on "banking" of emission allowances. The results are particularly important for emission intensive firms, policy makers, risk managers and for active or passive investors in the emerging class of energy and carbon hedge funds.

Daskalakis, George and Markellos, Raphael N (2008)  "Are the European Carbon Markets Efficient?" Review of Futures Markets, Vol. 17, No. 2, pp. 103-128, 2008.

Implications and Costs of the EU ETS Banking Prohibition on Emission Allowances

by Daskalakis, George and Markellos, Raphael

- The restrictions on the intertemporal trading of emission allowances between the two first phases of the EU Emissions Trading Scheme (EU ETS) have attracted criticism amongst practitioners and academics. In this note we discuss the implications and costs of these restrictions from the perspective of the participants in the emission allowance derivatives markets. Our estimate of the costs, which comes in the form of inflated inter-phase futures contract prices for carbon dioxide (CO2) emission allowances, amounts to a premium of about 3.5% or 6.6 billion Euros over a period of three years. It is argued that at least part of these costs may have been passed on to clients of polluting industries such as energy consumers.  

Daskalakis, George and Markellos, Raphael (2009). "Implications and Costs of the EU ETS Banking Prohibition on Emission Allowances"  - Working Papers

Driving Factors of Carbon Dioxide Emissions and the Impact from Kyoto Protocol

by Nicole Grunewald and Inmaculada Martínez-Zarzoso

- In this paper we aim to investigate whether the EKC behavior for CO2 emissions could be proved on the behalf of institutional regulations. We analyze the driving factors of CO2 for developed and developing countries to test the theory of the EKC in the context of environmental regulations using a static and dynamic panel data model.

Grunewald, N. and I. Martínez-Zarzoso (2009). "Driving Factors of Carbon Dioxide Emissions and the Impact from Kyoto Protocol." CESifo Working Paper No. 2758, August 2009.

A Comparison of Reduced-Form Permit Price Models and Their Empirical Performances

by Georg Gruell and Luca Taschini

- Equilibrium models have been proposed in literature with the aim of describing the evolution of the price of emission permits. This paper derives first estimation methods for the calibration of three competing equilibrium models. Second, it demonstrates how their reduced-form versions are inter-related. Third, by means of calibration to historical data, it is shown how these reduced-form models perform in the current price-evolution framework also with respect to standard continuous time stochastic models. 

Gruell G. and Taschini L. (2010). "A Comparison of Reduced-Form Permit Price Models and Their Empirical Performances".  MIT CEEPR Working Paper Series, WP-2009-018