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Emissions trading with transaction costs

Marc Baudry, Anouk Faure and Simon Quemin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; EU ETS; policy design and evaluation; transaction costs; Grantham Foundation for the Protection of the Environment; the UK Economic and Social Research Council (search for similar items in EconPapers)
JEL-codes: D23 H32 L22 Q52 Q58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2021-07-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Published in Journal of Environmental Economics and Management, 1, July, 2021, 108. ISSN: 0095-0696

Downloads: (external link)
http://eprints.lse.ac.uk/114321/ Open access version. (application/pdf)

Related works:
Journal Article: Emissions trading with transaction costs (2021) Downloads
Working Paper: Emissions trading with transaction costs (2021)
Working Paper: Emissions Trading with Transaction Costs (2020) Downloads
Working Paper: Emissions Trading with Transaction Costs (2020) Downloads
Working Paper: Emissions Trading with Transaction Costs (2020) Downloads
Working Paper: Emissions Trading with Transaction Costs (2020) Downloads
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