{"id":3310,"date":"2012-02-20T16:14:41","date_gmt":"2012-02-20T16:14:41","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=publication&#038;p=3310"},"modified":"2024-08-19T14:32:09","modified_gmt":"2024-08-19T13:32:09","slug":"the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing","status":"publish","type":"publication","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/","title":{"rendered":"The endogenous price dynamics of emission allowances and an application to CO2 option pricing"},"content":{"rendered":"<!DOCTYPE html PUBLIC \"-\/\/W3C\/\/DTD HTML 4.0 Transitional\/\/EN\" \"http:\/\/www.w3.org\/TR\/REC-html40\/loose.dtd\">\n<?xml encoding=\"UTF-8\"><h3>Abstract<\/h3>\n<p>Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and the European Emission Trading Scheme is an example. By means of dynamic optimization in the contest of firms covered by such environmental regulations, this article generates endogenously the price dynamics of emission permits under asymmetric information, allowing inter-temporal banking and borrowing. In the market, there are a finite number of firms and each firm&rsquo;s pollution emission follows an exogenously given stochastic process. We prove the discounted permit price is a martingale with respect to the relevant filtration. The model is solved numerically. Finally, a closed-form pricing formula for European-style options is derived.<\/p>\n<h3>Reference<\/h3>\n<p>Chesney, M., and Taschini, L. February 2012.&nbsp;<em>The endogenous price dynamics of emission allowances and an application to CO2 option pricing<\/em>. Applied Mathematical Finance, v.19, pp.447-475.<\/p>\n\n","protected":false},"excerpt":{"rendered":"<!DOCTYPE html PUBLIC \"-\/\/W3C\/\/DTD HTML 4.0 Transitional\/\/EN\" \"http:\/\/www.w3.org\/TR\/REC-html40\/loose.dtd\">\n<?xml encoding=\"UTF-8\"><p>Abstract Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and&hellip;<\/p>\n\n","protected":false},"author":43,"featured_media":0,"template":"","tags":[838,839,840,841],"publication-type":[436],"topic_area":[4694],"class_list":["post-3310","publication","type-publication","status-publish","hentry","tag-asymmetric-information","tag-environmental-finance","tag-european-emission-trading-scheme","tag-trading-decisions","publication-type-research-articles","topic_area-policy-evaluation"],"acf":{"downloads":{"ref_value":"field_52f16cc1a80f2","value":false,"type":"repeater","post_type":""},"profile_link":{"ref_value":"field_52f164b5189e9","value":["luca-taschini"],"type":"relationship","post_type":"profile"},"article_link":{"ref_value":"field_52eee3c7f0586","value":"https:\/\/www.tandfonline.com\/doi\/abs\/10.1080\/1350486X.2011.639948","type":false,"post_type":""},"article_link_title":{"ref_value":"field_5322399d89d42","value":"Applied Mathematical Finance. Volume 19,  Issue 5, pages 447-475. 2012","type":false,"post_type":""},"spotlight":{"ref_value":"field_52f80896506d3","value":"","type":false,"post_type":""},"exclude_from_sync":{"ref_value":"field_560538b0e7350","value":"0","type":false,"post_type":""},"rss_newsletter":{"ref_value":"field_54f5c2c1544d8","value":"","type":false,"post_type":""}},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment\" \/>\n<meta property=\"og:description\" content=\"Abstract Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and...\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/\" \/>\n<meta property=\"og:site_name\" content=\"Grantham Research Institute on climate change and the environment\" \/>\n<meta property=\"article:modified_time\" content=\"2024-08-19T13:32:09+00:00\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data1\" content=\"1 minute\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication\\\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\\\/\",\"url\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication\\\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\\\/\",\"name\":\"The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/#website\"},\"datePublished\":\"2012-02-20T16:14:41+00:00\",\"dateModified\":\"2024-08-19T13:32:09+00:00\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication\\\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\\\/#breadcrumb\"},\"inLanguage\":\"en-GB\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication\\\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication\\\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Publications\",\"item\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/?post_type=publication\"},{\"@type\":\"ListItem\",\"position\":3,\"name\":\"All research\",\"item\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication-type\\\/new-research\\\/\"},{\"@type\":\"ListItem\",\"position\":4,\"name\":\"Research article\",\"item\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/publication-type\\\/research-articles\\\/\"},{\"@type\":\"ListItem\",\"position\":5,\"name\":\"The endogenous price dynamics of emission allowances and an application to CO2 option pricing\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/#website\",\"url\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/\",\"name\":\"Grantham Research Institute on climate change and the environment\",\"description\":\"The Grantham Research Institute at LSE carries out world-class research on climate change and the environment.\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/www.lse.ac.uk\\\/granthaminstitute\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-GB\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/","og_locale":"en_GB","og_type":"article","og_title":"The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment","og_description":"Abstract Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, and...","og_url":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/","og_site_name":"Grantham Research Institute on climate change and the environment","article_modified_time":"2024-08-19T13:32:09+00:00","twitter_card":"summary_large_image","twitter_misc":{"Estimated reading time":"1 minute"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/","url":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/","name":"The endogenous price dynamics of emission allowances and an application to CO2 option pricing - Grantham Research Institute on climate change and the environment","isPartOf":{"@id":"https:\/\/www.lse.ac.uk\/granthaminstitute\/#website"},"datePublished":"2012-02-20T16:14:41+00:00","dateModified":"2024-08-19T13:32:09+00:00","breadcrumb":{"@id":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/#breadcrumb"},"inLanguage":"en-GB","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication\/the-endogenous-price-dynamics-of-emission-allowances-and-an-application-to-co2-option-pricing\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.lse.ac.uk\/granthaminstitute\/"},{"@type":"ListItem","position":2,"name":"Publications","item":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=publication"},{"@type":"ListItem","position":3,"name":"All research","item":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication-type\/new-research\/"},{"@type":"ListItem","position":4,"name":"Research article","item":"https:\/\/www.lse.ac.uk\/granthaminstitute\/publication-type\/research-articles\/"},{"@type":"ListItem","position":5,"name":"The endogenous price dynamics of emission allowances and an application to CO2 option pricing"}]},{"@type":"WebSite","@id":"https:\/\/www.lse.ac.uk\/granthaminstitute\/#website","url":"https:\/\/www.lse.ac.uk\/granthaminstitute\/","name":"Grantham Research Institute on climate change and the environment","description":"The Grantham Research Institute at LSE carries out world-class research on climate change and the environment.","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-GB"}]}},"taxonomies":{"post_tag":["Asymmetric information","environmental finance","European Emission Trading Scheme","trading decisions"],"publication-type":["Research article"],"topic_area":["Policy evaluation"]},"_links":{"self":[{"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/publication\/3310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/publication"}],"about":[{"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/types\/publication"}],"author":[{"embeddable":true,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/users\/43"}],"version-history":[{"count":1,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/publication\/3310\/revisions"}],"predecessor-version":[{"id":74472,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/publication\/3310\/revisions\/74472"}],"wp:attachment":[{"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/media?parent=3310"}],"wp:term":[{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/tags?post=3310"},{"taxonomy":"publication-type","embeddable":true,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/publication-type?post=3310"},{"taxonomy":"topic_area","embeddable":true,"href":"https:\/\/www.lse.ac.uk\/granthaminstitute\/wp-json\/wp\/v2\/topic_area?post=3310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}