On fair pricing of emission-related derivatives

TL;DR

This paper explores the fundamental principles for valuing emission-related derivatives within emission trading schemes, aiming to support effective risk management in climate change mitigation efforts.

Contribution

It introduces a logical framework for the valuation of emission allowances and derivatives, advancing the theoretical understanding of financial instruments in emission trading schemes.

Findings

Develops valuation principles for emission derivatives

Provides a theoretical foundation for risk management tools

Enhances understanding of emission trading financial instruments

Abstract

Tackling climate change is at the top of many agendas. In this context, emission trading schemes are considered as promising tools. The regulatory framework for an emission trading scheme introduces a market for emission allowances and creates a need for risk management by appropriate financial contracts. In this work, we address logical principles underlying their valuation.