The Clean Development Mechanism and Joint Price Formation for Allowances and CERs

René Carmona, Max Fehr

Research output: Chapter in Book/Report/Conference proceedingChapter

7 Scopus citations

Abstract

The goal of this paper is to propose an equilibrium model for the joint price formation of allowances issued by regulators in the framework of a cap-and-trade scheme and offset certificates such as CERs generated within the framework of the Clean Development Mechanism (CDM) or the Joint Implemenation (JI) of the Kyoto Protocol. Thereby we consider a system of cap-and-trade schemes, such as, e.g., the EUETS and a possible American Market (USETS) or Japan ETS, which are linked indirectly by the Clean Development Mechanism and for which banking is allowed. Besides deriving equilibrium price formulas for the joint price dynamics of these linked markets, the main thrust of the paper is to explain the spreads between European emission allowances EUAs and CERs as observed historically.

Original languageEnglish (US)
Title of host publicationProgress in Probability
PublisherBirkhauser
Pages341-383
Number of pages43
DOIs
StatePublished - 2011

Publication series

NameProgress in Probability
Volume63
ISSN (Print)1050-6977
ISSN (Electronic)2297-0428

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Mathematical Physics
  • Applied Mathematics

Keywords

  • cap-and-trade
  • carbon markets
  • energy economics
  • Environmental risk
  • Kyoto protocol

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