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Commodity Option Pricing: A Practitioner's Guide by Iain J. Clark

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9 Alternative Commodities

9.1 CARBON EMISSIONS TRADING

In recent years, the environmental impact of the petrochemical economy has become increasingly recognised. Regardless of one’s personal thoughts about climate change, there is both evidence and opinion (McKibben, 2012) that greenhouse gas emissions are quite possibly linked to global warming. Even if this concern turns out to be overly cautious, it seems no bad idea to take some precautionary measures just in case, while preserving economic growth and maintaining living standards.

A greenhouse gas is one that absorbs and then re-radiates thermal infrared radiation. This effectively blankets the planet and, by reducing the heat dissipated into the upper reaches of the atmosphere, to maintain surface temperatures many degrees warmer than would otherwise be the case. Without the greenhouse effect, the Earth’s temperature would be some 33 °C cooler than its current year-round planetary average of 14 °C. Conversely, with increased greenhouse gas concentrations comes the risk of global warming.

While there are many greenhouse gases such as water vapour, chlorofluorocarbons (CFCs), methane, nitrous oxide and ozone,1 the one that currently attracts the most attention is carbon dioxide. Without meaning to sound too alarmist about things, if a planet gets sufficiently hot that all the oceans boil and turn into water vapour (a potent greenhouse gas) then this can lead to a runaway greenhouse effect. This extreme fate is most unlikely ...

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