Emissions trading with transaction costs

Marc Baudry, Anouk Faure and Simon Quemin

Journal of Environmental Economics and Management, 2021, vol. 108, issue C

Abstract: We develop an equilibrium model of emissions permit trading in the presence of fixed and proportional trading costs in which the permit price and firms' participation in and extent of trading are endogenously determined. We analyze the sensitivity of the equilibrium to changes in the trading costs and firms' allocations, and characterize situations where the trading costs depress or raise permit prices relative to frictionless market conditions. We calibrate our model to annual transaction data in Phase II of the EU ETS (2008–2012) and find that trading costs in the order of 10 k€ per annum plus 1 € per permit traded substantially reduce discrepancies between observations and theoretical predictions for firms’ behavior (e.g. autarkic compliance for small and/or long firms). Our simulations suggest that ignoring trading costs leads to an underestimation of the price impacts of supply-curbing policies, this difference varying with the incidence on firms.

Keywords: Emissions trading; Transaction costs; Policy design and evaluation; EU ETS (search for similar items in EconPapers)
JEL-codes: D22 D23 H32 L22 Q52 Q58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Working Paper: Emissions trading with transaction costs (2021)
Working Paper: Emissions trading with transaction costs (2021)
Working Paper: Emissions Trading with Transaction Costs (2020)
Working Paper: Emissions Trading with Transaction Costs (2020)
Working Paper: Emissions Trading with Transaction Costs (2020)
Working Paper: Emissions Trading with Transaction Costs (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:108:y:2021:i:c:s0095069621000516

DOI: 10.1016/j.jeem.2021.102468

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