About the Book
1. Introduction to Emissions Trading
1.1 Review of International Climate Policies
1.1.1 From Rio to Durban
1.1.2 The Burgeoning EU CO2 Allowance Trading Market
1.2. Market Design Issues
1.2.1 Initial Allocation Rules
1.2.2 Equilibrium Permits Price
1.2.3 Spatial and Temporal Limits
1.2.4 Safety Valve
1.3. Key Features of the EU Emissions Trading Scheme
1.3.1 Scope and Allocation
1.3.2 Calendar
1.3.3 Penalties
1.3.4 Market Players
1.4 EUA Price Development
1.4.1 Structure and Main Features of EU ETS Contracts
1.4.2 Carbon Price
1.4.3 Descriptive Statistics
2. CO2 Price Fundamentals
2.1 Institutional Decisions
2.1.1 Dummy Variables
2.1.2 Structural Breaks
2.2 Energy Prices
2.2.1 Literature Review
2.2.2 Oil, Natural Gas and Coal
2.2.3 Electricity Variables
2.3 Extreme Weather Events
2.3.1 Relationship Between Temperatures and Carbon Prices
2.3.2 Empirical Application
Appendix: BEKK MGARCH Modeling With CO2 and Energy Prices
Problems
3. Link With The Macroeconomy
3.1 Stock and Bonds Markets
3.1.1 GARCH Modeling of the Carbon Price
3.1.2 Relationship With Stock and Bond Markets
3.2 Macroeconomic, Financial and Commodity Indicators
3.2.1 Extracting Factors Based On Principal Component Analysis
3.2.2 Factor-Augmented VAR Analysis Applied to EUAs
3.3 Industrial Production
3.3.1 Data
3.3.2 Nonlinearity Tests
3.3.3 Self-Exciting Threshold Autoregressive Models
3.3.4 Comparing Smooth Transition and Markov-Switching Autoregressive Models
4. The Clean Development Mechanism
4.1 CERs Contracts and Price Development
4.2 Relationship With EU Emissions Allowances
4.2.1 VAR Analysis
4.2.2 Cointegration
4.3 CERs Price Drivers
4.3.1 Zivot-Andrews Structural Break Test
4.3.2 Regression Analysis
4.4 Arbitrage Strategies: The CER-EUA Spread
4.4.1 Why So Much Interest in this Spread?
4.4.2 Spread Drivers
Appendix: Markov Regime-Switching Modeling With EUAs And CERs
Problems
5. Risk-Hedging Strategies And Portfolio Management
5.1 Risk Factors
5.1.1 Idiosyncratic Risks
5.1.2 Common Risk Factors
5.2 Risk Premia
5.2.1 Theory On Spot-Futures Relationships in Commodity Markets
5.2.2 Bessembinder and Lemmon's (2002) Futures-Spot Structural Model
5.2.3 Empirical Application
5.3 Managing Carbon Price Risk In The Power Sector
5.3.1 Economic Rationale
5.3.2 UK Power Sector
5.3.3 Factors Influencing Fuel-Switching
5.3.4 Econometric Analysis
5.3.5 Empirical Results
5.3.6 Summary
5.4 Portfolio Management
5.4.1 Composition of the Portfolio
5.4.2 Mean-Variance Optimization and the Portfolio Frontier
Appendix: Implied Volatility From Option Pricing
Problems
6. Advanced Topics: Time-To-Maturity and Modeling the Volatility of Carbon Prices
6.1 The Relationship Between Volatility and Time-To-Maturity in Carbon Prices
6.2 Background On the Samuelson Hypothesis
6.3 Data
6.3.1 Daily Frequency
6.3.2 Intraday Frequency
6.4 The 'Net Carry Cost' Approach
6.4.1 Computational Steps
6.4.2 Regression Analysis
6.4.3 Empirical Results
6.5 GARCH Modeling
6.5.1 GARCH Specification
6.5.2 Empirical Results
6.6 Realized Volatility Modeling
6.6.1 Computational Steps
6.6.2 Regression Analysis
6.6.3 Empirical Results
6.6.4 Sensitivity Tests
6.7 Summary
Appendix: Statistical Techniques To Detect Instability In The Volatility Of Carbon Prices
Solutions
Index
