Speculators are active in large markets for emission permits such as those developing under the Kyoto Protocol. Since speculators help risk‐averse firms hedging the risk stemming from uncertain future demand, their entry reduces permits' expected returns and volatility. We characterize the...

Tradable emission permits share many characteristics with financial assets. As on financial markets, speculators are likely to be active on large markets for emission permits such as those developing under the Kyoto Protocol. We show how the presence of speculators on a market for emission...