Template-Type: ReDIF-Article 1.0
Author-Name:  Don Bredin and John Parsons
Title:  Why is Spot Carbon so Cheap and Future Carbon so Dear? The Term Structure of Carbon Prices
Classification-JEL: F0
Volume:  Volume 37
Issue:  Number 3
Year:  2016
Abstract:  This study examines carbon spot and futures price relationships and the dynamics of the carbon term structure in the European Union Emission Trading Scheme (ETS) between 2005-2014. Using spot and futures prices, we calculate an implied cost of carry. According to received theory, the cost of carry is—with some exceptions—just the opportunity cost of money, so that the term structure of the cost of carry should exactly equal the term structure interest rates. However, we show that spot carbon allowances were originally expensive relative to futures, but since late 2008 the situation reversed and spot carbon allowances have been persistently cheap relative to futures prices. This dramatic shift coincides with the onset of the global financial crisis in late 2008 and the ongoing European banking crisis of 2010-2013. 
Handle: RePEc:aen:journl:ej37-3-Bredin
File-URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=2778
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