The Clean Development Mechanism and CER Price Formation in the Carbon Emissions Markets

In this paper, we propose an equilibrium model for the joint price formation of allowances issued by regulators in the framework of a cap-andtrade scheme such as the European Union Emissions Trading Scheme (EU ETS) and offset certificates such as CERs generated within the framework of the Clean Development Mechanism (CDM) or the Joint Implementation (JI) of the Kyoto Protocol. The main thrust of the paper is to derive equilibrium price formulas which explain the spreads observed historically.