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Emissions trading with transaction costs

Baudry, Marc, Faure, Anouk and Quemin, Simon (2021) Emissions trading with transaction costs. Journal of Environmental Economics and Management, 108. ISSN 0095-0696

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Identification Number: 10.1016/j.jeem.2021.102468


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.

Item Type: Article
Official URL:
Additional Information: © 2021 Elsevier Inc.
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy
Date Deposited: 11 Mar 2022 11:27
Last Modified: 14 Jun 2024 16:24

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