Environmental Engineering Reference
In-Depth Information
usances. For a methodology to calculate the
spreads see for example at Caisse des Dépôts
(http://www.caissedesdepots.fr/fileadmin/
PDF/finance_carbone/document_method-
ologie_tendances_carbone_en_v4.pdf).
(2008), Alberola et al. (2007), and Daskalakis
and Markellos (2009).
10 The Kyoto Protocol is a protocol to the United
Nations Framework Convention on Climate
Change (UNFCCC), aimed at fighting
global warming. The Protocol was initially
adopted on December 11, 1997, in Kyoto,
Japan. It entered into force on February 16,
2005. The Protocol allows for three flexible
mechanisms, i.e. emissions trading, the clean
development mechanism (CDM) and joint
implementation (JI), to allow industrialized
countries (so-called Annex I countries)
to meet their emission limitations by pur-
chasing reductions credits from elsewhere,
through financial exchanges, projects that
reduce emissions in non-Annex I countries,
from other Annex I countries, or from Annex
I countries with excess allowances. The EU
ETS was launched on January 1, 2005, as the
primary mechanism to achieve the so-called
“bubble” target, i.e. the target of an EU wide
reduction of 8% in the commitment phase
2008 to 2012. EU internal burden sharing
arrangements reflect a much wider range of
targets from a 28% reduction in Luxembourg
to a 27% increase in Portugal.
11 The terms primary market and secondary
market are used in accordance to their mean-
ing in securities markets. The primary market
is that part of a securities market that deals
with the issuance and initial placement of
securities or financial contracts which are,
henceforth, tradable in secondary markets.
Although most capital market legislations do
not treat them as such, emission allowances
are almost perfectly fungible securities with
efficient transfer of title mechanisms.
12 See for example Springer (2003) for a
comprehensive survey on this subject. This
paper gathers results from 25 models of the
market for tradable greenhouse gases emis-
sion permits. See also for example Springer
5
The fuel-switching price is the emissions
allowance price that is needed to make
gas-powered plants favored over coal-fired
plants. Kahnen (2006) suggests that the
market must be short of allowances in order
that fuel-switching prices drive the long-term
emissions allowance price level.
6
For an historical overview of the electric-
ity liberalization process and a thorough
description of the deregulated electricity
market structure see, for example, Mork
(2001).
7
There is empirical evidence of futures mar-
kets' superiority in terms of price discovery
compared to underlying cash markets. Fu-
tures are traded at the margin with by far
lower transaction and capital costs. This
results in higher liquidity and, hence, smaller
reaction rates to process new information.
See also early contributions on this by Gar-
bade and Silber (1996).
8
There is, for example, some early work prior
to the introduction of the EU ETS on this
matter by Soderholm (2000) and Estrada and
Fugleberg (1999). Mansanet-Bataller et al.
(2007) look at the interplay between emis-
sions, energy and weather. More recently,
Mansanet-Bataller and Soriano (2009) focus
on the volatility transmission between emis-
sions and energy markets, namely between
emissions, gas and oil markets. There is also a
fund of co-integration analysis between spot
and futures as well as across the different
trading venues within the EU ETS. See, for
example, Daskalakis and Markellos (2008).
9
See, for example, the analysis of effects on
risk premiums, price levels and drivers and
transmission across markets by Frino et al.
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