An intertemporal pricing model for CO2 allowances: The impact of the clean development mechanism

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and EconomicsThe increasing global attention to greenhouse emissions and the recent creation of EU Emission Trading Scheme has clearly suggested the need of consistent methods to value projects aimed to reduce gases. This need particularly concerns companies that have to find a way to both remain profitable and conform to new legal requirements. Multiple ways of cutting emission costs are available nowadays: short term abatement measures, which primary involve switching production machinery from coal to gas; long term abatement measures, which envisage the implementation of new types of projects .e.g Clean Development Mechanism or Joint Implementation Mechanism suggested by Kyoto Protocol -. In this work we study the impact of the introduction of both kinds of policy in a pricing model for CO2 allowances