CO₂ Prices and Portfolio Management during Phase II of the EU ETS

Since the launch of the European Union Emission Trading Scheme (EU ETS), the interest in the trade of EUAs is constantly increasing among academics and market participants. The objective of this article is twofold: (i) a detailed description of this new market is provided for portfolio managers, and (ii) a comprehensive study of the implications of including Phase II EUAs in diversified portfolios is undertaken using as expected returns both historical and risk-adjusted returns. The results show that the opportunity set do not vary if we consider historical returns and that if we take into account risk-adjusted returns the efficient set only increases if the investor takes a short position in Phase II EUAs. (author)