The Endogenous Price Dynamics of Emission Allowances and an Application to CO2 Option Pricing

摘要: Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, the European Emission Trading Scheme is an example. By means of dynamic optimization in contest firms covered by such environmental regulations, this article generates endogenously price dynamics emission permits under asymmetric information, allowing inter-temporal banking borrowing. In market, there finite number each firm's pollution follows exogenously given stochastic process. We prove discounted permit martingale with respect to relevant filtration. The model solved numerically. Finally, closed-form pricing formula European-style options derived.