By employing simple conceptual frameworks, we describe the price formation of emission permits using equilibrium models. The aim of the model is the description of the price of emission permits as an expectation over the future pollution levels. In particular, the equilibrium price reflects the scarcity or excess of permits in the market system.

Journal Articles

1. “Environmental Economics and Modelling Marketable Permits”, Asian-Pacific Financial Markets - forthcoming in 2010.
   

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3. Abstract: This paper provides an introductory review on fundamental concepts in environmental economics and offers a comprehensive overview of recent attempts at developing valid dynamic price models for emission permits.
   

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   The original publication is available at www.springerlink.com           DOI 10.1007/s10690-009-9108-2
   

Working Papers

1. “The Endogenous Price Dynamics of Emission Allowances and an Application to CO2 Option Pricing", (with M. Chesney) - submitted.
   

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3. Abstract: This paper analyses the equilibrium price of emission permits. Additionally, it investigates the effect of the presence of asymmetric information on the permit price formation.
   

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5. “The Endogenous Price Dynamics of Emission Permits in the Presence of Technology Change", (with M. Chesney) - in progress.
   

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7. Abstract: This paper extends the previous model incorporating the possibility of a change in the production technology.

In an effort to bridge the gap between theory and observed market-price behaviour, an increasing number of empirical studies is investigating the historical time series of the price of emission permits.

Journal Articles

1. “An Econometric Analysis of Emission Allowance Prices”, (with M. Paolella) - Journal of Banking & Finance, Vol 32, 10(2022-2032), 2008. 
   

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5. Abstract:  Knowledge of the statistical distribution of emission prices, and their forecastability, are crucial in constructing, among other things, purchasing and risk management strategies. This paper analyses the two emission permits markets, CO2  in Europe and SO2  in the US. Its effectiveness in terms of model fit and out-of-sample value-at-risk forecasting.
   

Working Papers

1. “A Comparison of Reduced-Form Permit Price Models and their Empirical Performances", (with G. Gruell) - submitted.
   

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3. Abstract: This paper derives estimation methods for the calibration of three competing equilibrium models - one of which is the Chesney and Taschini (2008). By means of calibration to historical data, it is shown how these reduced-form models perform in the current price-evolution framework also with respect to standard continuous time stochastic models.
   

The use of experimental methods in economics is now extensive. Experiments might improve our understanding of permit price behaviour in a system where compliance companies (polluters) are not the only players on the market for emission permits.

Working Papers

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2. “Technology Change and Presence of Institutional Investors in Experimental Markets for Emission Permits", (with M. Chesney, M. Wang) - in progress.
   

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4. Abstract: This paper experimentally investigates the induced timing of the change in the production technology. Additionally, it investigates the effect of the presence of financial institutions on the permit price formation.
   

We investigate current policy instruments proposed by environmental regulators as cost-effective instruments for the control of externality.

Working Papers

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2. “Cap-and-trade Properties under Different Scheme Designs", (with G. Gruell) - submitted.
   

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4. Abstract: This paper investigates the most relevant existing and proposed schemes design mechanisms. By introducing a stylized version of the equilibrium price formula of emission permits proposed in the current literature and by extending it, the paper attempts to evaluate the apparent objective of each proposed hybrid scheme. In particular, it systematically compares the expected enforcement costs of each hybrid scheme to the enforcement costs of an ordinary scheme. Finally, it assesses the impact of each scheme on the original environmental targets.
   

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6. “Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases", (with J. E. Parsons) - in progress.
   

1. Abstract: We construct two pairs of simple examples that help to clarify the role of a key assumption in the analysis of price or quantity controls of greenhouse gases in the presence of uncertain costs. Traditionally much has been made of the fact that greenhouse gases are a stock pollutant, and that therefore the marginal benefit curve must be relatively flat. The stock pollutant argument is considered dispositive, so that the preference for price controls is categorical. We show that this argument can only be true if the uncertainty about cost is a special form: all shocks are transitory.
   

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3. “Linking Emission Trading Schemes", (with G. Gruell) - submitted.
   

1. Abstract: Linking emission trading schemes would favour the deplation of low-cost abatement opportunities that are geographically spread over the globe. Using a simple model-free structure, the paper assesses how a unilateral link between two schemes or a bilateral link between schemes with restrictions on the amount of imported permits preempt a correct price convergence. Then, it shows under which conditions bilateral links between schemes with price containment mechanisms ensure permit price convergence.
   

By construction, markets for emission permits provides (in theory) the most cost-effective solution ensuring potentially large cost savings. The source of these cost savings is the capacity of economic instruments to take advantage of the large differentials abatement costs across polluters.

Working Papers

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2. “Flexibility Premium in Marketable Permits" - in progress.
   

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4. Abstract: This paper quantifies the large differentials described above in terms of a premium for flexibility embedded in the price of marketable permits. The paper derives an analytic solution of such a premium in the presence of reversible abatement measures characterised by delay in implementation.

As a consequence of the introduction of the EU ETS, the structure of the business profitability of several industries and their decision processes about the production processes and production location have changed

Journal Articles

1. “The Real Option to Fuel Switch in the presence of Expected Windfall Profits under the EU ETS", (with S. Urech) - Journal of Energy Markets, Vol. 3, 1(1-21), 2010.
   

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3. Abstract:  This paper investigates the opportunity of energy producers to switch from cheaper but more emission intensive coal to more expensive but less emitting gas-fired power plants with respect to the EU ETS. When CO2 opportunity costs are internalised, the rate of activation of the coal plant is actually increased. while the one of the gas plant decreases. Therefore, the operator relies more often on the most expensive and polluting option: the coal-generation.
   

Investment (and dis-investment) decisions and technology changes heavily depend on the presence of uncertainty. By accounting for the different types of uncertainty firms face, agents can evaluate more appropriately their investment alternatives.

Journal Articles

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2. “Entry and Exit Problems with Implementation Delay” (with M. Costeniuc and M. Schnetzer) - Journal of Applied Probability, Vol. 45, 4(1039-1059), 2008.
   

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4. Abstract: This paper studies the investment and disinvestment decisions in situations where there is a specific time lag from the time when the decision is taken to the time when the decision is implemented.

1. •The Grantham Research Institute on Climate Change and the Environment at LSE
   

2. •MIT Center for Energy and Environmental Policy Research 
   

3. •  Quantitative Environmental Finance network (open for discussions and other material on environmental finance)
   

4. •  Environmental Finance course at the University of Zurich