Carbon Emission Markets

Abstract

New regulatory frameworks designed to comply with the Kyoto protocol have been developed with the aim of decreasing global greenhouse gas emissions over both short and long time periods. Incentives must be established to encourage the transition to a clean energy economy. Emissions taxes represent a ``price{''} incentive for this transition, but economists agree this approach is suboptimal. Instead, the ``quantity{''} instrument provided by cap-and-trade markets are superior from an economic point of view. This chapter summarizes the current state of world cap-and-trade schemes as well as recent literature devoted to quantitative pricing and hedging tools for these markets.