This paper presents a stochastic equilibrium model for environmental markets that allows us to study the characteristic properties of emission permit prices induced by the design of today's cap-and-trade systems. We characterize emission permits as highly nonlinear contingent claims on...

Due to extreme volatility in the prices of CO2 permits observed in the European markets, effective hedging techniques such as futures contracts and option instruments rapidly developed, together with approximations to the dynamics of the underlying. To bridge the gap between theory and practice,...

We provide the first econometric investigation of volatility dynamics for the Carbon Financial Instrument (CFI) traded on the Chicago Climate Exchange (CCX). A CFI is a financial contract with the right to emit 100 metric tons of CO2 equivalent. In this study, we present evidence of infrequent...

Policies of lowering carbon demand may aggravate rather than alleviate climate change (green paradox). In a two-period three-country general equilibrium model with finite endowment of fossil fuel one country enforces an emissions cap in the first or second period. When that cap is tightened the...

This paper presents valuation models of emission allowance options under an emission trading scheme, operating in an open trading phase, where unused allowances are banked to subsequent phases without any limit. Empirical studies are carried out to show that allowance option prices exhibit...

Dealing with a new topic around the climate change finance, we present the carbon market and its mechanism, focussing on the link between the EUA and the CER markets as well as explaining the challenges of carbon regulation and the economy of primary and secondary CERs. Assuming polluting...