A comparison of reduced-form permit price models and their empirical performances

Produced as part of the Governments, markets and climate change mitigation CCCEP research programme theme

Working Paper 33


Equilibrium models have been proposed in literature with the aim of describing the evolution of the price of emission permits.

This paper derives first a reduced-form model from an equilibrium model, and thereby explains how existing reduced-form models are related to equilibrium models.

Second, by means of calibration to historical data, it is shown how these reduced-form models perform in the current price-evolution framework, also with respect to standard continuous time stochastic models.

Georg Grull and Luca Taschini