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Is carbon emissions trading profitable?

journal contribution
posted on 01.06.2015, 00:00 authored by Paresh Narayan, Susan SharmaSusan Sharma
The European Carbon Emissions Trading Scheme introduced in 2005 has led to both spot and futures market trading of carbon emissions. However, despite seven years of trading, we have no knowledge on how profitable carbon emissions trading is. In this paper, we first test whether carbon forward returns predict carbon spot returns. We find strong evidence on both in-sample and out-of-sample predictability. Based on this evidence, we forecast carbon spot returns using both carbon forward returns and a constant. We consider a mean-variance investor and a CRRA investor, and show that they have higher utility and can make more statistically significant profits by following forecasts generated from the forward returns model than from a constant returns model.

History

Journal

Economic Modelling

Volume

47

Pagination

84 - 92

Publisher

Elsevier

ISSN

0264-9993

Language

eng

Publication classification

C Journal article; C1 Refereed article in a scholarly journal

Copyright notice

2015, Elsevier