On fair pricing of emission-related derivatives

The climate rescue is on the top of the agendas today. To protect the environment, emission trading schemes are considered as one of the most promising tools. In a system of such type, a central author-ity allocates credits among emission sources and sets a penalty which must be paid per unit of pollutant which is not covered by credits at the end the period. This regulatory framework introduces a market for emission allowances and creates need for risk management by appro-priate emission-related financial contracts. In this work, we address logical principles underlying the fair valuation of such derivatives. Key words: environmental risk, energy economics, emission trading, emis-sion derivatives 1