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Linking with uncertainty: The relationship between EU ETS pollution permits and Kyoto offsets

Hintermann, Beat and Gronwald, Marc. (2019) Linking with uncertainty: The relationship between EU ETS pollution permits and Kyoto offsets. Environmental and Resource Economics, 74 (2). pp. 761-784.

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Abstract

Carbon offsets from the Kyoto Flexible Mechanisms can be used by firms in the EU Emissions Trading Scheme for compliance in lieu of EU allowances, making these carbon assets interchangeable. We offer an explanation of the price spread using a structural model of the price for Certified Emissions Reductions that combines three features: A limit for the use of Kyoto offsets within the EU ETS; a disconnect between the current price of offsets and their marginal cost of production due to institutional reasons; and uncertainty about future supply and demand of offsets. Our model expresses the offset price as an average of the EU allowance price and an offset's outside value, weighted by the probability of a binding import limit. Using monthly series of the United Nation's Clean Development Mechanism and Joint Implementation about offset supply and demand, we provide empirical support for our theory of offset price formation. Counterfactual simulations suggest that the price process is dominated by uncertainty.
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
Publisher:Springer
ISSN:0924-6460
e-ISSN:1573-1502
Note:Publication type according to Uni Basel Research Database: Journal article -- Additional publication or translation in: Online First
Language:English
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Last Modified:07 Oct 2019 15:59
Deposited On:08 Jul 2019 13:11

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