Carbon Risk Management

This paper presents a price assessment of the emission allowances that were introduced in 2005 at International Climate Exchange, Nord Pool, European Energy Exchange, Powernext and Energy Exchange Austria. The emission allowances traded at Nord Pool and International Climate Exchange are forward products with physical delivery (based on the European Union Allowance for prompt delivery as the spot price), while the products traded at European Energy Exchange, Powernext and Energy Exchange Austria are spot products. We calculate the price levels and correlation between the emission allowances traded at selected exchanges to determine if the prices exhibit a similar development. Likewise, we compare the prices of the emission allowances with the prices of coal and natural gas in the same period including historic developments. To further evaluate the impact of the EU Emissions Trading Scheme (EU ETS) we study the electricity prices in detail in Norway, Austria, Denmark, the Netherlands, France and Germany. Of interest is the price development before and after the introduction of the EU ETS. Due to the large uncertainty, companies desiring to trade or hedge their risks actively in the carbon market need to understand the role and potential impact of the key drivers and their interactions