Research
Research
Research undertaken in the EEFG can be categorized in three distinct, yet interrelated, areas:
Carbon Quantitative Finance
Under a cap-and-trade system for reducing the anthropogenic greenhouse gas emissions and thus addressing climate change, as in the case of the EU ETS, emission polluting firms are exposed to a whole new set of risk factors; the most important of them being emission allowance price and volume risk. In a similar fashion as in other commodity or financial markets, derivative products, like carbon futures and options, were introduced from as early as 2005 for risk management purposes. The pricing of these instruments however is not always straightforward since it requires an in-depth understanding of both the operation of the carbon markets and the continuous-time dynamics of the underlying emission allowance spot price process. The latter is also a necessity if one wishes to employ state-of-art investment appraisal techniques like the real options analysis. Considering further the size of the carbon markets and the stakes at hand, research into issues like the hedging effectiveness of the available derivative instruments, or perhaps into the introduction of more complex ones written on a combination of underlings, including carbon permits, electricity and weather variables is imperative. Additionally, since emission allowance markets are relatively new, investigating issues with respect to market microstructure and efficiency is highly relevant. Finally, research in Carbon Quantitative Finance provides also useful insights that can inform the European environmental policy process from a financial perspective. This is particularly important, considering the imminent establishment of emissions trading schemes in other parts of the world like the US and China.
Energy Finance
Considering that the production of electricity accounts for more than 80% of the carbon emissions covered in the EU-ETS provisions (Phase II of the scheme), it is not difficult to understand why power producers are the main players in the carbon markets and consequently the most relevant stakeholders. Moreover, in the deregulated electricity market environment were an emissions cap-and-trade system is also in place, as is the case for Europe, electricity risk management is highly complex and challenging. As a response, research in Energy Finance is oriented towards an in-depth understanding of the interrelations between the electricity and carbon markets. Specifically, the issues covered span a wide range; from the pricing of electricity derivatives and the hedging strategies for power producers to the no-arbitrage conditions between electricity and emissions permits prices and the carbon cost pass-through rate.
Financial regulation of environmental and energy markets
As liberalisation advances and new environmental and energy markets grow and develop, the competencies found in financial regulation become more relevant. Specifically, as these markets become more important and the associated risks augment, effective market supervision and monitoring competencies will need to be developed by the regulatory institutions. Indeed policymakers will need to ensure that sectoral and financial regulators work in a synergistic fashion that does not unnecessarily raise the bureaucratic burden. This synergy must strike a balance between, on the one hand securing supplies via market stability and ensuring market failures are minimized, and on the other hand ensuring the regulatory burden is light enough not to limit efficiency gains or discourage innovation.
