A Critical Overview
Chapter 6: Implementation issue 2: The secondary market for emission rights
This chapter addresses a crucial issue for the working of any emissions trading system: the market. This area has received less attention in the literature than other aspects of emissions trading design. This neglect is probably attributable to the belief that the emissions trading market will work as does any other market. While not suggesting that the emissions trading market is unique in any way, it still merits attention, since a well-functioning market is the precondition to allow for cost-effective abatement and for realizing the full benefits of an emissions trading system. Recently, the emissions trading market in Europe has been receiving more attention. After the fraud scandals that occurred in the EU ETS, issues such as market manipulation, market power and market oversight started to attract more interest. All of these issues are considered in the context of the EU ETS in this chapter. First, market manipulation on the spot market is addressed in Section 2; this section emphasizes that market manipulation can also take place in liquid emissions trading markets and should therefore not be underestimated by ETS designers. Section 3 considers market power and oversight issues in the context of EU ETS auctions; this section points out that even the use of auctions does not prevent distortions in competition and manipulation. ETS designers are therefore well advised to carefully consider auction design choices and establish efficient oversight structures.
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