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Financial intermediaries and emissions trading market development and pricing strategies

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  • Heindl, Peter

Abstract

This paper examines the role of intermediaries in quantity regulation theoretically and presents a data application to the EU Emissions Trading Scheme (EU ETS). The choice of regulated firms to trade permits through intermediaries or directly at the exchange is discussed. Permit pricing strategies of intermediaries and possible issues of market power of intermediaries are modeled. Based on empirical data, the model application aims to assess the actual costs (fees, fixed costs) from permit trading, which represent costs of transacting. In a competitive setup, costs are relatively modest with about 1% to 2% of the permit price. In the EU ETS, firms that trade more than 283,000t CO2/year are likely to directly access the exchange while others trade with intermediaries. In the unlikely event of an intermediary having market power, overall costs would be six times higher in the model application. Options for regulated firms to access a permit exchange directly at low costs decrease the costs of transacting considerably in a competitive and non-competitive intermediary market. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 12-064.

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Date of creation: 2012
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Handle: RePEc:zbw:zewdip:12064

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Keywords: permit trading; financial intermediaries; market power;

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  1. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  2. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
  3. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 753-65, November.
  4. Lata Gangadharan, 2000. "Transaction Costs in Pollution Markets: An Empirical Study," Land Economics, University of Wisconsin Press, vol. 76(4), pages 601-614.
  5. Montero, Juan-Pablo, 1998. "Marketable pollution permits with uncertainty and transaction costs," Resource and Energy Economics, Elsevier, Elsevier, vol. 20(1), pages 27-50, March.
  6. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
  7. Andreas Lange, 2012. "On the Endogeneity of Market Power in Emissions Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 52(4), pages 573-583, August.
  8. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.
  9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  10. Wirl, Franz, 2009. "Oligopoly meets oligopsony: The case of permits," Journal of Environmental Economics and Management, Elsevier, vol. 58(3), pages 329-337, November.
  11. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, Springer, vol. 29(3), pages 283-302, 05.
  12. Heindl, Peter, 2012. "Transaction costs and tradable permits: Empirical evidence from the EU emissions trading scheme," ZEW Discussion Papers 12-021, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  13. Malik, Arun S., 2002. "Further Results on Permit Markets with Market Power and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 371-390, November.
  14. Evy Crals & Lode Vereeck, 2005. "Taxes, Tradable Rights and Transaction Costs," European Journal of Law and Economics, Springer, Springer, vol. 20(2), pages 199-223, September.
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