Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractInternational o set certi cates trade at lower prices than European Union Allowances (EUAs), although they are substitutes within the EU Emissions Trading System (EU ETS) for CO 2 . Firms therefore had a strong incentive to use the cheaper certi cates. However, a considerable number of rms did not use their allowed o set quota and, by doing so, seemingly forwent pro ts. While most of the literature on emissions trading evaluates the e ciency of regulation in a frictionless world, in practice rms incur costs when complying with regulation. In order to assess the relevance of managerial and information-related transaction costs, this study examines the use of international o set credits in the EU ETS. It establishes a model of rm decision under xed entry costs and estimates the size of transaction costs rationalizing rm behavior using semi-parametric binary quantile regressions. Comparing binary quantile results with probit estimates shows that high average transaction cost result from a strongly skewed underlying distribution. I nd that for most rms the bulk of transaction costs stems from participation in the EU ETS in general, rather than additional participation in the o set trade.JEL : C25, D23, H23, Q58.

Emissions trading with transaction costs

“…Venmans, 2016;Karpf et al, 2018) or used econometric estimation techniques (e.g. Medina et al, 2014;Jaraitė-Kažukauskė & Kažukauskas, 2015;Naegele, 2018). Interestingly, or perhaps reassuringly for our approach, we obtain similar orders of magnitude as the latter studies.…”

“…15 Similarly, Jaraitė-Kažukauskė & Kažukauskas (2015) and Naegele (2018) employ static frameworks for their econometric estimations of transaction costs and their impacts on firms in the EU ETS. 16 In the ARP, Chen (2018) shows that it took time for firms to form and adapt their beliefs about future price levels, leading to biased banking strategies especially in the early stages of the program.…”

“…Finally, to our knowledge, Naegele (2018) is the only analysis to estimate the magnitude of trading costs, specifically fixed entry costs for both the permit and offset certificate markets.…”

“…Although our approach to selecting trading costs differs from the various methods used in the related empirical literature, our results are in the same range. For instance, Naegele (2018) estimates median and mean fixed permit market entry costs of 7 and 21 ke across firms in Phase II, respectively. 57 Similarly, estimates of proportional trading costs are in the order of 56 As a robustness check, we increase (resp.…”

“…In practice, indeed, frictions of various types are acknowledged to be pervasive as the empirical literature on permit markets attests (e.g. Carlson et al, 2000;Gangadharan, 2000;Hahn & Stavins, 2011;Jaraitė-Kažukauskė & Kažukauskas, 2015;Venmans, 2016;Karpf et al, 2018;Naegele, 2018; and, more generally, there are costs associated with trading in financial markets (e.g. Gârleanu & Pedersen, 2013;Dávila & Parlatore, 2020, and references therein).…”