Pricing emission permits in the absence of abatement

Hintermann, Beat. (2012) Pricing emission permits in the absence of abatement. Energy Economics, 34 (5). pp. 1329-1340.

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Official URL: http://edoc.unibas.ch/48538/

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If emissions are stochastic and firms are unable to control them through abatement, the cap in a permit market may be exceeded, or not be reached.  I derive a binary options pricing formula that expresses the permit price as a function of the penalty for noncompliance and the probability of an exceeded cap under the assumption of no abatement.  I apply my model to the EU ETS, where the rapid introduction of the market made it difficult for firms to adjust their production technology in time for phase 1.  The model fits the data well, implying that the permit price was at least partly driven by firms hedging against stochastic emissions.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Public Economics / Public Finance (Hintermann)
UniBasel Contributors:Hintermann, Beat
Item Type:Article, refereed
Article Subtype:Research Article
Note:Publication type according to Uni Basel Research Database: Journal article
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edoc DOI:
Last Modified:06 Apr 2018 10:48
Deposited On:16 Mar 2017 10:50

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