Emission allowances: Difference between revisions

The [[Emission allowances|emissions allowance]] is a fascinating, transgressive product. It challenges the traditional boundaries in finance. It is neither [[debt]] nor [[equity]], and has none of the qualities of either: it confers no [[ownership]], there is no [[credit exposure]], and at least in some jurisdictions allowances cannot be [[pledge|pledged]] or held in [[trust]], so they acquire the [[credit exposure]] of whomever you find to hold them on your behalf. In some ways they behave rather like a [[cash]] instrument: they represent an abstract value whilst having no intrinsic worth, can only be held, not owned, but unlike cash they expire, and before expiry can be redeemed — not for money, but for the release from an obligation to pay money.

Emissions allowance trading schemes are a bit “[[King Cnut|Cnutish]]” in that they are a creature of unilateral government decree: the regulators declared that carbon polluters must submit these allowances, and so they did. In this way you can regard emissions trading as a form of pure, unadulterated regulatory derivative.

As [[Financial instrument|financial instruments]], emissions allowances are unusually susceptible to ''further'' government decree, which may at any time change their terms or eligibility for surrender, or abolish them altogether, as governments of different stripes wax and wane on how they feel about the environment. This is a lot less likely to happen to [[Debt security|bonds]] or [[Equity securities|stocks]]. The risk increases the further into the future you look, meaning that the emissions market tends to trade over a short time-horizon of no more than a year or two. On the other hand, the forward curve is pretty steep, making it an attractive product to finance if you know how.

== Documentation ==

==== Fraud, theft and tax ====

{{Commodity regulation}}

{{de minimis threshold capsule}}

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*[[De minimis threshold test]]

{{c|Emissions}}

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