Transaction Costs and Tradable Permits: Empirical Evidence from the EU Emissions Trading Scheme

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-Technical SummaryIn this paper, transaction costs of German firms, regulated under the EU emissions trading scheme (EU ETS) are examined empirically. Introduced in 2005, the EU ETS currently regulates carbon dioxide emissions of roughly 11,000 installations in the 27 EU member states, Norway, Liechtenstein and Iceland. Its aim is to reduce greenhouse gas (GHG) emissions in energy intensive industry branches and utility companies by 21 percent until 2020 compared to 2005.Transaction costs can be seen as costs for managing the EU ETS and carrying out necessary administrative tasks. As the data reveal, transaction costs depend on annual emissions and annual volumes of traded emissions allowances of firms in a nonlinear fashion, based on OLS and nonparametric estimation. This implies the presence of scale economies in the management of the EU ETS. Overall transaction costs increase for firms that have emissions levels ranging from zero to approximately one million tons of CO 2 emissions per year. Overall transaction costs decrease for firms with more than one million tons of CO 2 emissions (see figure 3). Based on the results, overall annual transaction costs for all German firms regulated under the EU ETS are estimated at 8.7 EUR million c.p. in average.In contrast to assumptions made by standard economic theory, marginal transaction costs also depend on annual emissions levels and annual trading volumes respectively. This implies that firms also take the costs of managing the EU ETS and costs for general administrative obligations into account when minimizing costs under the EU ETS. As a consequence, the firm's incentives for greenhouse gas abatement are different than in a 'first-best' case with zero transaction costs. In practice, firms with less than one million tons of annual emissions (which do not profit from economies of scale in the management) will emit less (abate more) than emitters with more than one million tons of annual emissions. Although the changes are small and will not affect environmental effectiveness of the EU ETS, economic efficiency is decreased by transaction costs, resulting in a welfare loss.The average transaction costs (transaction costs divided by annual emissions) are highly different for firms of different sizes. Average transaction costs are relatively high for smaller emitters (up to EUR 1.00 per ton CO 2 ), but trickle down with rising annual emissions of a firm. At low emissions levels, such as 5,000 or 10,000 tCO 2 p.a., d...

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

“…Electricity and heat generation account for one third of all rms, and half of total emissions. 36 Electricity rms are known to have active and sophisticated compliance and trading behavior, likely because of the experience from electricity trading (Heindl, 2012).…”

“…A common strategy among German SMEs is to trade only at the end of the year and only if the grandfathered allocation is not su cient (Loeschel et al, 2011). Surveys show that large emi ers set up more sophisticated structures to optimize their compliance and face smaller per-tonne transaction costs (Heindl, 2012;Jaraite and Kazukauskas, 2012;Loeschel et al, 2010Loeschel et al, , 2011. Similarly supporting the idea of xed costs, Jaraite et al (2010) estimate that per tonne participation costs of the largest rms were e0.05 per tonne of emissions, while they were up to e2 per tonne for small rms.…”

Explaining European Emission Allowance Price Dynamics: Evidence from Phase II

“…Furthermore, we think that this explanatory approach could be improved by looking at the effects of thin trading and transaction costs (e.g. Montagnoli and de Vries 2010;Heindl, 2012). In turn, reducing transactions costs and uncertainty about overall emissions would reduce the option value in holding an EUA and therefore bring the market more back to equalization of marginal abatement costs.…”

“…Heindl (2012) shows based on survey data that transactions costs matter in particular for small firms, while they decrease for firms emitting more than one million tons CO 2 . He estimates that small firms have to bear about one additional Euro per ton traded so that it might be favorable for them not to actively engage in trading.…”

Winners and Losers of EU Emissions Trading: Insights from the EUTL Transfer Dataset

“…However, after some years of experience with the instrument, questions emerged as to whether or not this assumption holds, especially in the context of transaction costs (Heindl 2012;Schleich and Betz 2004) or market power (Antelo and Bru 2009;Hintermann 2010). In this paper, I analyze another dimension of emissions trading, namely its distributional effects, and ask the question: Who were the winners and losers of EU Emissions Trading (EU ETS) during its first period?…”