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CO2 investment risk analysis

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  • Thomas M. Treptow

    (University of Cooperative Education)

Abstract

Utilities with hard coal and lignite power plants, manufacturers, and aviation companies in the EU that emit greenhouse gases must invest in emission allowances to run their operations. The buy side of the capital market (e.g. hedge funds, insurers, and pension plans) can invest in these allowances to realise an investment asset which is uncorrelated to traditional market-risk investments. Given the high volatility of the price of emission allowances, all investors in emission allowances face a challenging risk-return situation that requires a thorough risk analysis. We show that this analysis can be undertaken using extreme value theory. For the analysed extreme emission allowance price returns, we identified saliently good fits between the empirical and theoretical Pareto distributions. We further show that emission allowances present an interesting investment case.

Suggested Citation

  • Thomas M. Treptow, 2024. "CO2 investment risk analysis," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 19-30, February.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:1:d:10.1057_s41260-023-00342-z
    DOI: 10.1057/s41260-023-00342-z
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    References listed on IDEAS

    as
    1. Erik Haites, 2018. "Carbon taxes and greenhouse gas emissions trading systems: what have we learned?," Climate Policy, Taylor & Francis Journals, vol. 18(8), pages 955-966, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investing in greenhouse gas emission allowances; Investment risk analysis; Extreme value theory; Asset allocation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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