Risk premia in CO₂ allowances: spot and futures prices in the EEX market

Abstract

Purpose

This paper seeks to analyze stylized statistical properties of the recent traded asset CO₂ emission allowances, for spot and futures returns, examining also the relation linking convenience yield and risk premium, for the German European Energy Exchange (EEX) between October 2005 and October 2009.

Design/methodology/approach

The study was conducted through empirical estimations of CO₂ allowances risk premium, convenience yield, and their relationships.

Findings

Future prices from an ex-post perspective are examined to show evidence for significant negative risk premium, or a positive forward premium. A positive relationship between risk premium and time-to-maturity is found. Both financial concepts are found to be negatively affected by spot price volatility. Convenience yield is positively influenced by CO₂ price, while influencing the risk premium positively.

Practical implications

From a financial perspective, allowances seem to be producing the desired effects in terms of environmental policies, although a lot more remains to be done. The presence of risk premium and convenience yield makes it clear that agents act in this commodity market according to risk consideration. Results change depending on phase and futures contracts used for the determination of both financial terms, indicating that uncertainties over the future of EU-ETS seem to be decreasing.

Originality/value

Previous research has mainly focused on the first phase of the EU-ETS (2005-2007), whereas this paper extends the analysis period here. The paper finds some opposite results compared with previous commodities theories and designs some policy implications, given the results attained.

Citation

Madaleno, M. and Pinho, C. (2011), "Risk premia in CO₂ allowances: spot and futures prices in the EEX market", Management of Environmental Quality, Vol. 22 No. 5, pp. 550-565. https://doi.org/10.1108/14777831111159699