Handbook of Environmental and Sustainable Finance

Chapter 17

Using CO₂ Emission Allowances in Equity Portfolios

Michael Graham, Anton Hasselgren,  and Jarkko Peltomäki     Stockholm Business School, Stockholm University, Stockholm, Sweden

Abstract

In this chapter, we show that while the carbon emission allowance futures market, which is still emerging, has gained relative little popularity among investors it can present attractive diversification opportunities for investors. Our findings show that the exposure of these futures returns to equity returns as well as the value factor is low but increases with stock market stress. As our further analysis suggests that investors can also profit from negative convenience yield in carbon emission futures by taking short positions in them, the strategy can ...