Issue: Volume 3/Number 2, Summer 2010
Comment
Letter from the Editor-in-Chief
Financial transactions involving carbon-related assets have emerged as a cornerstone of the international efforts on climate change mitigation. Moreover, integration of carbon risks into investment decisions is becoming a pervasive trend in many asset classes, with investor leverage putting market discipline on corporations to manage and disclose carbon-related performance data. In many ways financial markets have become pivotal to the implementation of international climate agreements. Following the financial crisis and the associated global economic downturn, however, market conditions for i ...

Issue: Volume 3/Number 2, Summer 2010
Research Papers
Evaluating carbon governance: the clean development mechanism from an emerging economy perspective
The clean development mechanism (CDM) is one of the most hotly debated instruments of carbon governance. This paper evaluates the pros and cons of the CDM from the perspective of emerging economies. The argument presented is that the CDM is a classic case of the need not to "throw the baby out with the bathwater" because, although the mechanism needs reform, it should not be abandoned. Although many problems have rightfully been detected, the CDM is partially successful economically, environmentally and politically regarding its output, its outcome and its impact. This reading of the CDM as a ...

Issue: Volume 3/Number 2, Summer 2010
Research Papers
The real option to fuel switch in the presence of expected windfall profits under the EU Emission Trading Scheme
This paper develops a simple model for evaluating the value and the activation frequencies of a generation system consisting of coal-fired and gas-fired power plants, using a real-options approach and the notions of clean-spark and clean-dark spreads. Under a cap-and-trade scheme, the use of emission permits represents an opportunity cost. In the energy industry, different generation technologies produce different levels of CO2 emissions and, therefore, different opportunity costs. Addressing the question of how real expected windfall profits affect the profitability of a generation plant and ...

Issue: Volume 3/Number 2, Summer 2010
Research Papers
Jump-robust estimation of realized volatility in the EU Emissions Trading Scheme
With the increased availability of high-frequency financial market data in recent years, the extraction of "realized" volatility (from intraday squared returns) has led to numerous theoretical developments and empirical applications for a wide range of equity and commodity markets. This paper documents the measure of realized volatility in the European Union Emission Trading Scheme (EU ETS) with respect to the presence of microstructure noise and jumps in the estimation procedure. In order to include jumps in the modeling of CO2 intraday volatility returns, we use the bipower variation measure ...

Issue: Volume 3/Number 2, Summer 2010
Research Papers
On the pricing of emission reduction purchase agreement contracts
The vital importance of Emission Reduction Purchase Agreement (ERPA) contracts to the carbon market motivates the development of accurate valuation techniques. We propose a pricing methodology based on the formulation of a generic payout function, with an analysis of the underlying drivers (emissions reduction delivery and carbon prices) leading to their stochastic model representation. Although applicable to any emissions reduction markets and standards, the rationale is developed around ERPAs based on the delivery of Certified Emission Reduction (CER) certificates from Clean Development Mech ...