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The Clean Development Mechanism and Joint Price Formation for Allowances and CERs

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Seminar on Stochastic Analysis, Random Fields and Applications VI

Part of the book series: Progress in Probability ((PRPR,volume 63))

Abstract

The goal of this paper is to propose an equilibrium model for the joint price formation of allowances issued by regulators in the framework of a cap-and-trade scheme and offset certificates such as CERs generated within the framework of the Clean Development Mechanism (CDM) or the Joint Implemenation (JI) of the Kyoto Protocol. Thereby we consider a system of cap-and-trade schemes, such as, e.g., the EUETS and a possible American Market (USETS) or Japan ETS, which are linked indirectly by the Clean Development Mechanism and for which banking is allowed. Besides deriving equilibrium price formulas for the joint price dynamics of these linked markets, the main thrust of the paper is to explain the spreads between European emission allowances EUAs and CERs as observed historically.

Mathematics Subject Classification (2000). Primary 99Z99; Secondary 00A00.

Also with the Bendheim Center for Finance and the Applied and Computational Mathematics Program

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Author information

Authors and Affiliations

  1. Department of Operations Research and Financial Engineering, Princeton University, Princeton, NJ, 08544, USA

    René Carmona

  2. Centre for the Analysis of Time Series, London School of Economics and Political Science, London, WC2A 2AE, USA

    Max Fehr

Authors
  1. René Carmona
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  2. Max Fehr
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Corresponding author

Correspondence to René Carmona .

Editor information

Editors and Affiliations

  1. Fac. Sciences de Base (FSB), Institut de Mathématiques (IMA), Ecole Polytechnique Fédérale de Lausanne, Lausanne, 1015, Switzerland

    Robert Dalang

  2. Institut Élie Cartan IECN, Nancy Université, Vandoeuvre-les-Nancy CX, France

    Marco Dozzi

  3. , Unité de Mathématiques appliquées, Ecole Nationale Supérieure des Technique, Boulevard Victor 32, Paris Cedex 15, 75739, France

    Francesco Russo

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Carmona, R., Fehr, M. (2011). The Clean Development Mechanism and Joint Price Formation for Allowances and CERs. In: Dalang, R., Dozzi, M., Russo, F. (eds) Seminar on Stochastic Analysis, Random Fields and Applications VI. Progress in Probability, vol 63. Springer, Basel. https://doi.org/10.1007/978-3-0348-0021-1_21

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