The Emission Trading: CO2 Emission Allowances

Student: Panasenkova Elizaveta

Faculty: International College of Economics and Finance

Educational Programme: Double degree programme in Economics of the NRU HSE and the University of London (Bachelor)

Year of Graduation: 2020

The major reason of climate change which is responsible for approximately 64% of global warming is considered to be Carbon dioxide (CO2), colorless and odorless gas. This paper studies emission allowance trading systems as one of the solutions for air pollution, the negative externality arising from production. However, as it is essential for carbon market players to learn about their price dynamics in order to realize trading strategies, risk strategies and investment decisions, we also are going to analyze price dynamics of carbon dioxide emission allowances and model the historical data taken from European Energy Exchange, central European electric power exchange. We suggest an ARMA-GARCH specification for the series of logarithmic returns of carbon dioxide emission allowances and prove this by making tests. Moreover, we consider the Capital Asset Pricing Model in order to estimate how the risk of the CO2 emission allowances correlates with the market risk.

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