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Emissions Trading with Transaction Costs

Anouk Faure, Marc Baudry () and Simon Quemin

No 2020-19, EconomiX Working Papers from University of Paris Nanterre, EconomiX

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 alternatively depress or raise permit prices relative to frictionless market conditions. We calibrate our model to annual transaction and compliance data in Phase II of the EU ETS (2008-2012) which we consolidate at the firm level. We 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). 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)
Pages: 56 pages
Date: 2020
New Economics Papers: this item is included in nep-env, nep-mst and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2020-19

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