Forecasting the CO2 Certificate Price Risk

IWH-Diskussionspapiere 5/2008

23 Pages Posted: 22 Aug 2010 Last revised: 17 Feb 2014

See all articles by Wilfried Ehrenfeld

Wilfried Ehrenfeld

Halle Institute for Economic Research

Henry Dannenberg

Halle Institute for Economic Research

Date Written: March 9, 2008

Abstract

Modeling the price risk of CO2 certificates is one important aspect of integral corporate risk management related to emissions trading. The paper presents a risk model which may be the basis for evaluating the risk of emission certificate prices.

We assume that the certificate price is determined by the expected marginal CO2 abatement costs prevailing at the current trade period and stochastically fluctuates around the respective level as returned from the mean reversion process.

Due to uncertainties about future environmental states we suppose that within one trade period, erratic changes in the expected marginal abatement costs may occur leading to shifts in the price level. The aim of the work is to model the erratic changes of the expected reversion level and to estimate the parameters of the mean reversion process.

Note: Downloadable document is in German.

Keywords: risk, carbon dioxide, emissions trading, EUA, CO2 certificate price, mean reversion process

JEL Classification: D81, G32, L59, Q54, Q56, Q58

Suggested Citation

Ehrenfeld, Wilfried and Dannenberg, Henry, Forecasting the CO2 Certificate Price Risk (March 9, 2008). IWH-Diskussionspapiere 5/2008 , Available at SSRN: https://ssrn.com/abstract=1662356 or http://dx.doi.org/10.2139/ssrn.1662356

Wilfried Ehrenfeld (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Henry Dannenberg

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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