Cutting edge technical: Carbon derivatives pricing

In carbon dioxide equilibrium models, permit prices are positive and bounded by the penalty level. To obtain closed-form solutions to the pricing of carbon dioxide derivatives, Daniel Bloch models the permit price as a function of a positive unbounded process, and shows that there is no equivalent probability measure whereby the discounted spot price is a martingale

Evidence of extreme volatility in the European permit markets suggests the urgent need for the development of selective hedging techniques such as futures contracts and option instruments. As a result, a valid price model is required for pricing financial instruments or projects whose value derives from the future carbon dioxide (CO₂) spot permit price. Due to the recent introduction in the market of option-like instruments for hedging purposes, various models were developed to approximate the