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Emissions Trading as a Policy InstrumentEvaluation and Prospects$
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Marc Gronwald and Beat Hintermann

Print publication date: 2015

Print ISBN-13: 9780262029285

Published to MIT Press Scholarship Online: January 2016

DOI: 10.7551/mitpress/9780262029285.001.0001

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The Relationship between Spot and Futures CO2 Emission Allowance Prices in the EU ETS

The Relationship between Spot and Futures CO2 Emission Allowance Prices in the EU ETS

(p.183) 8 The Relationship between Spot and Futures CO2 Emission Allowance Prices in the EU ETS
Emissions Trading as a Policy Instrument

Stefan Trück

Wolfgang Härdle

Rafal Weron

The MIT Press

We investigate the relationship between spot and futures prices within the EU-ETS. We conduct an empirical study on price behavior, volatility term structure and correlations in EU Allowance (EUA) contracts during the pilot trading and the first Kyoto commitment period. For the pilot trading period, the market was initially in backwardation. After the news of sufficiently high allocations, both allowance prices and convenience yields approached zero, while futures contracts referring to the Kyoto commitment period were less affected by the price drop. During Phase II, we find that the market has changed from initial backwardation to contango with significant convenience yields in futures contracts. We attribute this deviation from the cost-of-carry relationship to three main factors: low interest rates in the Eurozone; market participants’ willingness to pay a premium for a hedge against rising prices in future periods, and, the increasing level of surplus allowances and banking during Phase II.

Keywords:   CO2 Emissions Trading, Commodity Markets, Spot and Futures Prices, Convenience Yields

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