Environmental Engineering Reference
In-Depth Information
Figure 8. Logarithmic returns of EUA DEC 08 futures contract traded at ECX 26
the second compliance phase. This created a dis-
continuity in supply of EUA between the phases.
Secondly, the EU Commission announced stricter
second phase allocations. From this incidence,
the futures prices responded to different dynam-
ics. Owing to the over-allocation, contracts with
maturities in the first phase declined towards zero
and finally settled at the end of the compliance
period in December 2007 at a price of 0.01€. In
contrast, contracts with maturities in the second
phase increased to 20€. By December 2007 they
traded at a 25€ level. The pricing of futures con-
tracts between the distinct trading periods as well
as between first phase spot prices and second phase
futures prices became completely disconnected.
In summary, the supply and demand in the
EU ETS form up within constraints set by the
EU Member States and the EU Commission. This
creates a level of institutional uncertainty and
risk usually not present in other trading markets.
Consequently, there is a specific risk premium
in emissions markets charged for institutional
uncertainty. This risk premium surfaces in vari-
ous facets like, for example, strongly fluctuating
returns and highly volatile daily trading volumes.
Figure 8 shows the log returns of the DEC
08 futures contract throughout its lifetime. The
contract was fully hit by the incidences discussed
above. Accordingly, daily returns experienced
extreme oscillations in the respective periods
in 2006. However, a simple visual inspection of
the graph reveals three of the stylized features
of emissions prices: mean reversion, short-term
periodicities and spikes. Similar characteristics
can be found in short-term electricity contracts
(Daskalakis, Psychoyios and Markellos, 2009;
Geman and Roncoroni, 2006). But log returns of
electricity with comparable maturities oscillate
at a slightly lower level. Yearly base load futures
traded on the EEX show daily return variability in
the 5% to 6% range. Consequently, the remarkably
high oscillations of returns observed in emissions
markets are in part a spill over from the electric-
ity adjacencies. But they are also a result of the
institutional design uncertainties and frictions.
Interaction of On- and Off-Exchange
Trading
At a first glance, Figure 9 shows that daily volumes
have grown continuously and so has liquidity.
Reasonable levels were already achieved in 2007,
when daily volumes on ECX started to average
above the 5 million. After scratching the 20 mil-
lion tons average at the beginning of 2009, daily
averages now seem to be at around 15 million tons.
But Figure 9 also shows two remarkable char-
acteristics, the volatility of daily volumes and the
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