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The impact of administrative transaction costs in the EU emissions trading system

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  • Peter Heindl

Abstract

This article empirically investigates the impact of transaction costs for monitoring, reporting, and verification (MRV) of emissions on companies regulated by the EU Emissions Trading System (EU ETS) in Germany. Based on a unique panel dataset, we investigate if MRV costs are dependent on the amount of annual emissions of regulated companies and if there are differences in transaction costs between economic sectors. The results indicate that administrative costs are dependent on the amount of annual emissions for larger companies, which has implications for the economic efficiency of the EU ETS. The most important finding, however, is that there are significant differences in MRV transaction costs dependent on the type and size of companies. This implies the existence of considerable economies of scale. Overall, the EU ETS could benefit from reforms by means of a push towards upstream regulation as this would likely increase administrative efficiency.Policy relevance statementTransaction costs are, among other things, an important aspect of market-based climate policy design. A policy instrument with low transaction costs is preferred over instruments with larger transaction costs under equal conditions. This is occasionally referred to as administrative efficiency, and its importance was acknowledged in directive 2009/29/EC of the European Commission. Thoughtful empirical examination of transaction costs is essential in order to inform about the extent and impact of these costs. This article provides an analysis of transaction costs for monitoring, reporting, and verification (MRV) of emissions in the EU ETS. It is shown that administrative costs will likely have negative effects on the cost efficiency of the EU ETS. However, the most relevant finding is that small companies (<250 employees) or firms emitting small amounts of carbon dioxide per year face far higher average transaction costs compared with larger firms or emitters. Thus, there is a tendency for the EU ETS to cause MRV transaction costs that are disadvantageous for small companies. A regulation that is more upstream-oriented could mitigate this negative effect to some extent. The EU ETS could initiate a reform that is targeted on putting a price on the carbon content of fossil fuels instead of directly regulating emissions in a so-called ‘end-of-the-pipe’ way at the installation level.

Suggested Citation

  • Peter Heindl, 2017. "The impact of administrative transaction costs in the EU emissions trading system," Climate Policy, Taylor & Francis Journals, vol. 17(3), pages 314-329, April.
  • Handle: RePEc:taf:tcpoxx:v:17:y:2017:i:3:p:314-329
    DOI: 10.1080/14693062.2015.1110108
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    Cited by:

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    2. Marc Baudry & Anouk Faure & Simon Quemin, 2020. "Emissions Trading with Transaction Costs," Working Papers 2007, Chaire Economie du climat.
    3. Jun Dong & Yu Ma & Hongxing Sun, 2016. "From Pilot to the National Emissions Trading Scheme in China: International Practice and Domestic Experiences," Sustainability, MDPI, Open Access Journal, vol. 8(6), pages 1-17, May.
    4. Lin, Boqiang & Jia, Zhijie, 2018. "The energy, environmental and economic impacts of carbon tax rate and taxation industry: A CGE based study in China," Energy, Elsevier, vol. 159(C), pages 558-568.
    5. Joltreau, Eugénie & Sommerfeld, Katrin, 2016. "Why does emissions trading under the EU ETS not affect firms' competitiveness? Empirical findings from the literature," ZEW Discussion Papers 16-062, ZEW - Leibniz Centre for European Economic Research.
    6. Johannes Enzmann & Marc Ringel, 2020. "Reducing Road Transport Emissions in Europe: Investigating A Demand Side Driven Approach †," Sustainability, MDPI, Open Access Journal, vol. 12(18), pages 1-31, September.
    7. Helene Naegele, 2018. "Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 70(1), pages 77-106, May.
    8. Naegele, Helene, 2018. "Offset Credits in the EU ETS: A Quantile Estimation of Firm-Level Transaction Costs," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 77-106.
    9. Wang, Xu & Zhu, Lei & Fan, Ying, 2018. "Transaction costs, market structure and efficient coverage of emissions trading scheme: A microlevel study from the pilots in China," Applied Energy, Elsevier, vol. 220(C), pages 657-671.
    10. Wolfgang Eichhammer & Nele Friedrichsen & Sean Healy & Katja Schumacher, 2018. "Impacts of the Allocation Mechanism Under the Third Phase of the European Emission Trading Scheme," Energies, MDPI, Open Access Journal, vol. 11(6), pages 1-23, June.
    11. John F. Raffensperger, 2020. "A price on warming with a supply chain directed market," Papers 2003.05114, arXiv.org, revised Mar 2021.
    12. Yolanda Fernández Fernández & María Angeles Fernández López & David González Hernández & Blanca Olmedillas Blanco, 2018. "Institutional Change and Environment: Lessons from the European Emission Trading System," Energies, MDPI, Open Access Journal, vol. 11(4), pages 1-16, March.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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