Luis Ferruz Agudo Fernando Gómez-Bezares Isabel Marco Sanjuán Sara Segura Querol University of Zaragoza and University of Deusto GESFIN Financial Research Group MISTRA Workshop. May 12, Bilbao

 Introduction  Background  European Union Emissions Trading Scheme (EU ETS)  Nord Pool´s Financial Market  European Union Allowances (EUA)  Conclusions & Further Research MISTRA Workshop. May 12, Bilbao

 Energy security + climate change  KEY ISSUES  The trading of greenhouse gas emissions in environmental markets has become a key policy instrument to deal the problem of global climate change.  Energy markets influence the energy policy goals of security, affordability and environmental and social concerns. MISTRA Workshop. May 12, Bilbao

ENVIRONMENTAL MARKETS ENERGY MARKETS EUROPEAN UNION EMISSIONS TRADING SCHEME (EU ETS) NORD POOL´S FINANCIAL MARKET MISTRA Workshop. May 12, Bilbao

 Why have we chosen the EU ETS and the Nord Pool´s financial market? The first and biggest international scheme for the trading of greenhouse gas emission allowances. (11,000 power stations and industrial plants in 30 countries). EU ETS The first European market (for turnover and for diversity of assets) in the negotiation of derivatives of electricity. NORD POOL´S FINANCIAL MARKET MISTRA Workshop. May 12, Bilbao

 How can companies contribute to the European climate change policies by investing in the EU ETS and the Nord Pool´s financial market? MISTRA Workshop. May 12, Bilbao

 Sadorsky (2006), Henriques and Sadorsky (2010), Sadorsky (2010). Managing energy price risk is essential for every company as energy security and climate change policies are becoming increasingly important.  Busch and Hoffman (2007). Suggest that companies should integrate risks that are related to the natural environment into corporate risk management. MISTRA Workshop. May 12, Bilbao

 Egenhofer (2007), Braun (2009), Mackenzie (2009). Emissions trading has become one of the main instruments to mitigate climate change.  Benz (2009), Daskalakis et al (2009), Conrad et al (2011). Examine the price dynamics of CO2 emission allowances in the EU ETS.  Diaz-Rainey and Siems (2011). Financial risks of investing in energy and environmental markets also influence the goals of both energy and environmental policies. MISTRA Workshop. May 12, Bilbao

 More about the EU ETS : ◦ It was launched in ◦ Operates in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). ◦ It covers:  CO 2 emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board.  Nitrous oxide emissions from certain processes.  Airlines will join the scheme.  Petrochemicals, ammonia and aluminium industries. MISTRA Workshop. May 12, Bilbao NOW FUTURE

The implementation of the EU ETS has been divided into three trading phases:  PHASE 1: 1 January 2005 to 31 December “Learning by doing” phase.  PHASE 2: 1 January 2008 to December The EU and its Member States must comply with their emission targets under the Kyoto Protocol.  PHASE 3: 1 January 2013 to 31 December MISTRA Workshop. May 12, Bilbao

TRADED VOLUMES OF EU ALLOWANCES Source: European Commission

MISTRA Workshop. May 12, Bilbao ETS ALLOWANCES PER COUNTRY Source: European Commission

 More about the Nord Pool´s Financial Market: ◦ The Nord Pool group consists of:  Nord Pool ASA (the financial market).  Nord Pool Spot AS (the physical-delivery spot markets). ◦ The Nord Pool Financial Market was established in ◦ Contract types traded:  Power derivatives.  European Union allowances (EUAs).  Certified emission reductiones (CERs). MISTRA Workshop. May 12, Bilbao

MISTRA 2011 Source: Nord Pool VOLUMEN OF FINANCIAL CONTRACTS TRADED

 One EUA gives the right to emit one tone of CO 2.  Member States have to frame national allocations plans for each trading period establish how many allowances each company can receive each year.  A company could face two different situations: ◦ CO 2 Emissions < EUA SELL EUA PRICE ◦ CO 2 Emissions > EUA BUY EUA MISTRA 2011

MISTRA Workshop. May 12, Bilbao Limit on total number of EUA Scarcity EUA prices Companies have incentives to reduce CO 2 emissions Goal of EU climate change policy: reduce green house emissions from human acitivies EUA prices are the cornerstone of the European Union's policy to combat climate change. That is the reason why modeling EUA prices is essential. Some authors suggest the use GARCH models. (Benz and Trück (2009), Conrad et al (2011))

MISTRA 2011 Source: European Commission PRICE OF EU ALLOWANCES

 Companies can contribute to the European Union climate change policy by the trading of the European Union Allowances (EUA).  One interesting research path is how to model the EUA prices behaviour.  Another one is how to model the relationship between companies sustainable investment in energy and environmental markets and the reduction of greenhouse gases emissions. MISTRA Workshop. May 12, Bilbao