Indifference prices for carbon emission allowances. The European carbon market context
Abstract
We discuss the pricing of carbon emission allowances in the European Union Emission Trading Scheme (EU ETS) context. We study the EU ETS price, according to a given sector's players aggregation : the electricity producers. We model the indifference price with a stochastic control problem for a producer that can dynamically switch between coal, gas or hydro power plants, and/or buy/sell emission allowances. We discuss the computation of the indifference price sensitivities.