CO₂ emission allowances trading in Europe - specifying a new class of assets

In the context of controlling greenhouse gas emissions, the directive on an EU-wide trading scheme for carbon dioxide (CO₂) emission allowances may be considered as one of the major steps towards reducing environmental burden. A major question for market participants will be about regarding the price behavior of this new environmental asset. Due to non-maturity of the market, political regulations, fundamentals and certain characteristics of CO₂ allowances it can be assumed that parameters for the price process or even the process itself changes through time. In this paper we review the stylized facts of emission allowances and come up with suggestions to model their price behavior adequately. We conduct a preliminary empirical analysis of CO₂ allowance spot prices supporting our theoretical findings.11 page(s