Trading Frictions in Dynamic Cap-and-Trade Markets

Nicola Borri, Yukun Liu, Aleh Tsyvinski and Xi Wu

No 35356, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a dynamic stochastic model of markets with an externality and multiple trading frictions, and cap-and-trade as the leading application. Slow participation, limited intermediation, and heterogeneous information interact in equilibrium: agents choose costly market access, access determines residual compliance demand, intermediary constraints translate residual demand into a surrender-month premium, and the premium feeds back into access incentives. These interactions shape how effectively the market corrects the externality. We characterize access choices in closed form, prove that the equilibrium premium is unique, and show that endogenous access dampens the response to each friction in isolation, while the interaction of multiple frictions is non-additive and can amplify the price response. We quantify the model using 2.7 million EU ETS registry transactions and compliance records from 2005–2021. About 40% of operators do not trade annually, purchases concentrate in April when returns are systematically high, and operator flow predicts future returns.

JEL-codes: H0 (search for similar items in EconPapers)
Date: 2026-06
Note: AP EEE PE
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35356.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
Working Paper: Trading Frictions in Dynamic Cap-and-Trade Markets (2026)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:35356

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35356
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().