Carbon Portfolio Management

35 Pages Posted: 10 Oct 2014 Last revised: 24 Sep 2016

See all articles by Alex Afonin

Alex Afonin

University College Dublin (UCD)

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Cal B. Muckley

University College Dublin

Dirk Nitzsche

City University London - Sir John Cass Business School

Date Written: October 9, 2014

Abstract

The aim of the European Union's Emissions Trading Scheme is that by 2020, emissions from sectors covered by the EU ETS will be 21% lower than in 2005. In addition to large CO$_2$ emitting companies covered by the scheme, other participants have entered the market with a view to using emission allowances for the diversification of their investment portfolios. The performance of this asset as a stand alone investment, as well as its portfolio diversification implications will be investigated in this paper. Our results indicate that the market views Phase 1, Phase 2 and Phase 3 EUA futures as unattractive as stand alone investments. In a portfolio context, in Phase 1, once the short-selling option is added, there are considerable portfolio benefits. However, our results indicate that these benefits only existed briefly during the pilot stage of the EU ETS. There is no evidence to suggest portfolio diversification benefits exist for Phase 2 or the early stages of Phase 3.

Suggested Citation

Afonin, Alex and Bredin, Don and Muckley, Cal B. and Nitzsche, Dirk, Carbon Portfolio Management (October 9, 2014). Available at SSRN: https://ssrn.com/abstract=2507725 or http://dx.doi.org/10.2139/ssrn.2507725

Alex Afonin

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Don Bredin (Contact Author)

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

Cal B. Muckley

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

Dirk Nitzsche

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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