Trading Frictions in Dynamic Cap-and-Trade Markets

Nicola Borri, Yukun Liu, Aleh Tsyvinski and Xi Wu

Papers from arXiv.org

Abstract: Using 2.8 million EU ETS transactions and compliance records, 2005-2022, we document three facts about the world's largest carbon market: each year, 37% of regulated operators do not trade, and non-trading is persistent. Purchases concentrate in the April surrender month, when returns are systematically high. Operator order flow predicts returns, concentrated among frequent traders. A model with costly market access, limited intermediation, and heterogeneous information rationalizes all three. Because access is endogenous, the frictions interact non-additively, shaping how efficiently the market corrects the externality. Staggering deadlines across four groups lowers the surrender-month premium by 58% without changing the cap.

Date: 2026-06, Revised 2026-10
New Economics Papers: this item is included in nep-mst
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Working Paper: Trading Frictions in Dynamic Cap-and-Trade Markets (2026)
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