Three essays on emission credit markets

This is a comprehensive study about the emission trading system. The first chapter is about designing an optimal hybrid emission control system in a multiple compliance period setup. Previous studies have primarily focused on a hybrid policy of emission regulation that included an emission cap and permit price ceiling in a single period model, we extend this literature by developing such an optimal hybrid model in a multi-period framework where banking and borrowing of emission permits is allowed. In our model, we compare the case of a regulator who sets the emission cap and price ceiling to be consistent with a long run emission objective with the case of a regulator who occasionally is motivated to deviate from the optimal long run regulatory policy in order to correct for unexpected but exceptionally high emissions. Using a discrete dynamic programming model with stochastic emissions, we show that the hybrid model gives the regulator a degree of freedom in making an optimal price and quantity choice.;The second chapter is about linking the emission allowance market and the offset credit market. The Kyoto Protocol established targets for curbing greenhouse gas emissions in order to mitigate climate change, and it introduced two kinds of market-based mechanisms: the emission allowance market and the carbon offset market. We identify stylized features of the interaction between the two mechanisms. Our partial equilibrium model is the first analytic work that derives a closed form solution incorporating most policy instruments, such as abatement and offset usage, and delivery risks in offsets. The equilibrium solution enables to show an asymmetric price change of allowances and offsets in both directions and magnitude. We show how the price equilibrium and the price spread between allowances and offsets are affected by market conditions, such as the offset import limit, abatement and offset cost, penalty rate, emission cap, and base emissions.;The third chapter is about the exchange rate effect on carbon credit price via energy markets. The main purpose of the paper is to examine the impact of currency exchange rates on the carbon market. We scrutinize this effect through the European Union Emission Trading Scheme (EU-ETS), which primarily uses two substitutable fossil energy inputs for the generation of electricity: coal and natural gas. The European coal market is directly driven by global coal markets that are denominated in USD, whereas, natural gas is mainly imported from Russia and is denominated in Euro. The impulse response functions of a Structural Vector Autoregression (SVAR) model demonstrates that a shock in the Euro/USD exchange rate can be transmitted through the channel of energy substitution between coal and natural gas, and therefore, produces influences on the carbon credit market.