Fair price of carbon credits - an account of incentive price offers

Abstract

In this paper, we introduce the relationship between carbon credit prices and incentive bids. We incorporate different carbon trading systems on Certified Emission Reduction units to examine the underlying distribution of their price paths. We adopt the use of software like R and Easy Fit to accomplish this task. Based on the analysis of the opening and closing carbon credit prices during 2007 to 2014 from the Emission Reduction Trading System, we establish the distributions as being a Gamma 3p for EUAs and Cauchy for CERs. We also establish the lack there of independence in the prices of carbon credits in different branding systems and determine the valuation of carbon credit projects implemented in Kenya. We provide the detailed policy implications of the above conclusions especially so for developing economies.