Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

CHAPTER 5 Emissions Markets and Products

Marc Chesney, Luca Taschini and Jonathan Gheyssens

5.1 INTRODUCTION

Climate change is one of the greatest challenges facing our planet in the coming decades and centuries. It has impacts on the environment, human health, our livelihoods, social relationships and the global economy. It is now scientifically accepted that human production of carbon dioxide and other greenhouse gases (GHGs) is directly related to global warming and therefore impacting virtually every aspect of economic activity from agricultural outputs to energy mix and consumption. In economic terms, air pollution and global warming are partially the consequence of an absence of tradable prices for certain ‘public good’ environmental resources, such as clean air. These would command the introduction of surrogate prices in the form of unit taxes or marketable emission permits in order to provide the necessary signal to use their resources optimally with limited negative externalities.

Emissions are not a traditional commodity. They cannot be stored like wheat or oil. They do not justify a positive price based on their marginal productivity in a production function, like metals or precious earth. Instead, their value (and price) is a human construct, an institutional way to impose a price on a negative externality. Where most commodity models price the commodity added value (from global demand), pricing models for emissions address the crucial issue of a just penalty, a ...