Practical Applications of The Carbon Risk Premium

Abstract

1. Michael Azlen 1. is the chief executive officer at Carbon Cap Management, LLP in London, UK. (mike.azlen{at}carbon-cap.com) 2. Glen Gostlow 1. is a PhD candidate at the London School of Economics & Political Science in London, UK. (g.gostlow{at}lse.ac.uk) 3. Alex Child 1. is the head of Carbon Markets Research at Carbon Cap Management, LLP in London, UK. (alex.child{at}carbon-cap.com) In [ The Carbon Risk Premium ][1], from the Summer 2022 issue of The Journal of Alternative Investments , Michael Azlen and Alex Child of Carbon Cap Management and Glen Gostlow of the London School of Economics & Political Science present innovative research on a new and very important asset class. They explain how emission trading systems (ETSs) are an increasingly popular and effective tool for implementing legislation to lower carbon emissions. These systems create markets for tradable carbon allowances. The authors provide a summary of the world’s carbon markets, analyze variables affecting carbon prices, and assess carbon as a class of investable assets. For each of four liquid carbon markets, they determine a total-return time series, accounting for the collateral return as well as the roll effect between carbon futures contracts. They use the time series to create a composite index and analyze its performance, volatility, and correlation with other asset classes. They also evaluate the prognosis for emission levels and carbon prices, considering spot and futures linkages and the causes of a potential risk premium. [1]: https://doi.org/10.3905/jai.2022.1.166