Topic: Fixing the puzzle of the (in)conveniencevield of carbon allowances
Time: 10:00 AM-11:30PM, June 7, 2025
Location: Room A706, New Main Building
Guest: Marc Baudry is a professor of economics at the University of Paris Nanterre and research fellow at the EconomiX laboratory afliated at the National Center for Scientific Research (CNRS). He is carrying out research in environmental economics, more specifically on the European carbon market and on low carbon innovation. He is also a senior research fellow at the Climate Economics Chair where he oversees the research axis "CO2 pricing and low carbon innovation". His work has been published in international journals such as the Journal of Environmental Economics and Management or Environmental and Resource Economics. He also regularly contributes to collective books on its research themes and has published a book devoted to the economics of patents. Marc Baudry supervised doctoral students working today in international organizations, ministries, companies specializing in climate issues or in the academic world. He is also Visiting Professor at the College of Europe (Bruges Campus, Belgium) where he provides a course devoted to the economics of European environmental and climatic policies within the Master of Science in European Economic Studies.
Abstract:
The EU-ETS is the key public policy instrument implemented by the European Commission to respect the carbon budget set by the European Union. However, it has many features that make it quite similar at first glance to commodity markets, including the possibility of banking allowances and the possibility of hedging against the risk of fluctuation in the price of European Union Allowances (EUAs) through derivative contracts. These features aim to create flexibility and reduce the compliance costs of firms covered by theEU-ETS, but they also make understanding the dynamics of the EU-ETS complex. Economistshave highlighted in particular the paradox of a negative convenience yield. The research presented here aims to resolve this paradox by relying on a model of the carbon market in stochastic dynamic programming with rational expectations, heterogeneous firms, and risk aversion. in particular, it is highlighted that the banking behavior of firms, as well as the sign and magnitude of the convenience yield of EUAs, depend closely on the structure of correlation between shocks on the baseline emissions of firms. As a result, a negative convenience yield concomitant with banking is not in itself an anomaly in the functioning of the market.
