Inefficiencies of Carbon Trading Markets

Nicola Borri, Yukun Liu, Aleh Tsyvinski and Xi Wu
Additional contact information
Yukun Liu: University of Rochester
Aleh Tsyvinski: Yale University
Xi Wu: University of California - Berkeley

No 2403, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: The European Union Emission Trading System is a prominent market-based mechanism to reduce emissions. While the theory is well- understood, we are the first to study the whole cap-and-trade mechanism as a financial market. Analyzing the universe of transactions in 2005-2020 (more than one million records of granular transaction data), we show that this market features significant inefficiencies undermining its goals. First, about 40% of firms never trade in a given ear. Second, many firms only trade during surrendering months, when compliance is immediate and prices are predictably high. Third, a number of operators engage in speculative trading, exploiting private information.

Pages: 18 pages
Date: 2024-07
New Economics Papers: this item is included in nep-ene and nep-mst
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Working Paper: Inefficiencies of Carbon Trading Markets (2024)
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