Inefficiencies of Carbon Trading Markets

Nicola Borri, Yukun Liu, Aleh Tsyvinski and Xi Wu

Papers from arXiv.org

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 year. 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.

Date: 2024-08, Revised 2024-08
New Economics Papers: this item is included in nep-ene, nep-mst and nep-reg
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http://arxiv.org/pdf/2408.06497 Latest version (application/pdf)

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Working Paper: Inefficiencies of Carbon Trading Markets (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2408.06497

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