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Inefficiencies of Carbon Trading Markets

Author

Listed:
  • Nicola Borri

    (LUISS University)

  • Yukun Liu

    (University of Rochester)

  • Aleh Tsyvinski

    (Yale University)

  • Xi Wu

    (University of California - Berkeley)

Abstract

The European Union Emission Trading System is a prominent market-based mechanism to reduce emissions. While the theory is well- understood, we are the first to study the whole cap-and-trade mechanism as a financial market. Analyzing the universe of transactions in 2005-2020 (more than one million records of granular transaction data), we show that this market features significant inefficiencies undermining its goals. First, about 40% of firms never trade in a given ear. Second, many firms only trade during surrendering months, when compliance is immediate and prices are predictably high. Third, a number of operators engage in speculative trading, exploiting private information.

Suggested Citation

  • Nicola Borri & Yukun Liu & Aleh Tsyvinski & Xi Wu, 2024. "Inefficiencies of Carbon Trading Markets," Cowles Foundation Discussion Papers 2403, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2403
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    References listed on IDEAS

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    Cited by:

    1. Chiappari, Mattia & Scotti, Francesco & Flori, Andrea, 2025. "Portfolio hedging through a novel equity index based on the verified emissions of EU ETS-regulated firms," Economics Letters, Elsevier, vol. 247(C).

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