School Seminars and Colloquia

Modeling price dynamics of emission allowances


by Juri Hinz

Institution: National University of Singapore
Date: Tue 11th December 2007
Time: 11:00 AM
Location: Old Geology Theatre 1, Parkville Campus - Uni of Melbourne

Abstract: The climate rescue is on the top of the agendas today. To protect the
environment, emission trading schemes are considered as one of the most
promising tools. In a system of such type, a central authority allocates
credits among emission sources and sets a penalty which must be paid per
unit of pollutant which is not covered by credits at the end the period.
This regulatory framework introduces a market for emission allowances and
creates a need for risk management by appropriate emission-related
financial contracts. In this talk we apply methodologies from stochastic
analysis to address logical principles underlying price formation of
tradable pollution certificates. Based on tools from optimal control
theory, we characterize the equilibrium allowance prices and show the
existence of the proposed price dynamics. Further, we illustrate the
computational tractability of the resulting models. In the context of the
least squares Monte Carlo method, we utilize fixed point arguments to
derive appropriate numerical schemes, which are illustrated by examples.

For More Information: Konstantin Borovkov