Research Handbook on Emissions Trading
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Research Handbook on Emissions Trading

Edited by Stefan E. Weishaar

Research Handbook on Emissions Trading examines the origins, implementation challenges and international dimensions of emissions trading. It pursues an interdisciplinary approach drawing on law, economics and at times, political science, to present relevant research strands regarding emissions trading. Intermixing theoretical insights with experiences from existing trading systems, this Handbook offers insights that can be applied around the world. It identifies key bodies of research for both upcoming and seasoned people in the field and highlights future research opportunities.
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Chapter 4: Analyses of allowance transactions – firm behaviour in the first trading phase and learnings from the data

Claudia Kettner

Abstract

The idea of emissions trading reflects the fact that the costs of reducing emissions differ between regulated entities. Differences in marginal abatement costs will hence spur permit trading, leading to their equalization across market participants and aggregate cost efficiency in equilibrium. In view of the broad range of activities covered by the EU ETS, one can expect significant differences in emission reduction costs and hence strong incentives for trade. This chapter presents empirical evidence on trading in the EU ETS: EUA trade is analysed and discussed and the use of international credits for compliance under the EU ETS is addressed on country and sector level. In addition, trading flows on installation and company level are assessed. The empirical analysis of the EU ETS shows that the assumptions of the theory of emissions trading are not matched by the real-world setting. Allowance imports and exports showed only a very limited correlation with allowance surpluses and allowance deficits. This phenomenon cannot only be observed at country and sector level, where differences between installations and intra-firm transfers could have been a possible explanation for these discrepancies, but first analyses of trading in the EU ETS show that several companies have bought additional allowances on the market in Phase 1 despite being endowed with surplus allocation and the absence of banking between Phases 1 and 2. While the EU ETS is far from being a perfect market, empirical evidence shows an increase in trading activity since 2005 as agents became accustomed to the new market. A higher stringency of the cap in the EU ETS and the possibility of banking allowances might help stabilise carbon prices and hence mitigate inefficiencies.

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