Risk and Reward in Allowance Portfolios.
Emissions allowances held by US power generating companies have market values which in many cases exceed $500 million. Yet they were allocated at zero cost to help companies comply with the US Clean Air Act. Furthermore, annual price volatility of sulphur dioxide (SO2) allowances can exceed 40%. But traditionally these allowances have been managed only to meet compliance obligations without regard to their fluctuating market value. Now, however, a growing number of generating companies are learning to retain, and often improve, the economic value of these assets.A decision to hold allowances until compliance not only poses market price risk, it also suspends considerable financial value in a vacuum of underutilised and often undervalued assets leading to higher net generation costs and lower