Carbon emission permit price volatility reduction through financial options

Title: Carbon emission permit price volatility reduction through financial options
Format: Journal Article
Publication Date: January 2016
Published In: Energy Economics
Description:

We develop a stylized model to investigate the impact of financial options on reducing carbon permit price volatility under a cap-and-trade system. The existence of an option market provides a mechanism to hedge the uncertainty of future spot prices and is a stimulus for investment in carbon emission abatement technologies. We show that both the spot price level and the price volatility of carbon permits can be reduced via the trading of financial options, while achieving the emission reduction target. We also show that introducing financial op- tions in a banking environment offers more flexibility to risk management in carbon permit trading. 

Ivan Allen College Contributors:
External Contributors: Li Xu, Shijie Deng
Citation:

Xu, L., Deng, S.-J., Thomas, V. M. Carbon emission permit price volatility reduction through financial options. Energy Economics 53: 248-260, 2016. http://dx.doi.org/10.1016/j.eneco.2014.06.001  

Categories:
  • Climate Change Mitigation
  • Energy, Climate and Environmental Policy
  • Financing and Subsidies
  • Market-based Incentives
Related Departments:
  • Other (Non-IAC) Department
  • School of Public Policy