Universität Karlsruhe
together with Marliese Uhrig-Homburg
Forward Price Dynamics of CO2 Emission Certificates - An Empirical Analysis
Abstract: CO2 emission certificates are available as a new financial instrument in the EU emissions trading scheme (EU ETS). Besides spot certificates also forward contracts are traded OTC and on exchanges across Europe already. The focus of this study is on the relationship between spot and forward markets in the EU ETS. After thorough empirical examination we find strong evidence that spot and forward prices are tied together by the cost-of-carry approach. Spot prices equal discounted forward prices within a trading period,which has implications on the pricing of derivative instruments on emission certificates. Moreover, we find that forward markets clearly lead the price discovery process of CO2 emission certificates.