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Emissions trading with transaction costs

Author

Listed:
  • Marc Baudry

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Anouk Faure

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Simon Quemin

Abstract

We develop an equilibrium model of emissions permit trading in the presence of fixed and proportional trading costs in which the permit price and firms' participation in and extent of trading are endogenously determined. We analyze the sensitivity of the equilibrium to changes in the trading costs and firms' allocations, and characterize situations where the trading costs depress or raise permit prices relative to frictionless market conditions. We calibrate our model to annual transaction data in Phase II of the EU ETS (2008–2012) and find that trading costs in the order of 10 k€ per annum plus 1 € per permit traded substantially reduce discrepancies between observations and theoretical predictions for firms' behavior (e.g. autarkic compliance for small and/or long firms). Our simulations suggest that ignoring trading costs leads to an underestimation of the price impacts of supply-curbing policies, this difference varying with the incidence on firms.

Suggested Citation

  • Marc Baudry & Anouk Faure & Simon Quemin, 2021. "Emissions trading with transaction costs," Post-Print hal-03210325, HAL.
    • Handle: RePEc:hal:journl:hal-03210325
    DOI: 10.1016/j.jeem.2021.102468
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    Citations

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    Cited by:

    1. Simone Borghesi & Michael Pahle & Grischa Perino & Simon Quemin & Maximilian Willner, 2023. "The Market Stability Reserve in the EU Emissions Trading System: A Critical Review," Annual Review of Resource Economics, Annual Reviews, vol. 15(1), pages 131-152, October.
    2. Estelle Cantillon & Aurélie Slechten, 2024. "Market Design for the Environment," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    3. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    4. Anouk Faure & Marc Baudry, 2021. "Technological Progress and Carbon Price Formation: an Analysis of EU-ETS Plants," Working Papers hal-04159764, HAL.
    5. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    6. Heijmans, Roweno J.R.K. & Engström, Max, 2024. "Time Horizons and Emissions Trading," Discussion Papers 2024/2, Norwegian School of Economics, Department of Business and Management Science.
    7. Quemin, Simon, 2022. "Raising climate ambition in emissions trading systems: The case of the EU ETS and the 2021 review," Resource and Energy Economics, Elsevier, vol. 68(C).
    8. Perino, Grischa, 2024. "Carbon market design and market sentiment," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    9. Cheng, Peiyue & Wang, Tingsong, 2023. "Optimizing the emission control policies and trade-in program effects: A carbon-constrained closed-loop supply chain network model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 179(C).
    10. Maogang Tang & Silu Cheng & Wenqing Guo & Weibiao Ma & Fengxia Hu, 2023. "Relationship between carbon emission trading schemes and companies’ total factor productivity: evidence from listed companies in China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(10), pages 11735-11767, October.
    11. Pahle, Michael & Quemin, Simon & Osorio, Sebastian & Günther, Claudia & Pietzcker, Robert, 2025. "The emerging endgame: The EU ETS on the road towards climate neutrality," Resource and Energy Economics, Elsevier, vol. 81(C).
    12. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    13. Jan Abrell & Johanna Cludius & Sascha Lehmann & Joachim Schleich & Regina Betz, 2022. "Corporate Emissions-Trading Behaviour During the First Decade of the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(1), pages 47-83, September.
    14. Kefu Lin & Rui Pan & Dao-Zhi Zeng, 2024. "Carbon tax vs. emission trading in a monopolistically competitive market with heterogeneous firms," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 73(2), pages 825-848, August.
    15. Cláudia R. R. Eirado & Douglas Silveira & Daniel O. Cajueiro, 2025. "Digital Twins and Network Resilience in the EU ETS: Analysing Structural Shifts in Carbon Trading," Sustainability, MDPI, vol. 17(15), pages 1-31, July.
    16. Andrea Flori & Alessandro Spelta, 2025. "Carbon trade biases and the emerging mesoscale structure of the European Emissions Trading System network," Nature Communications, Nature, vol. 16(1), pages 1-17, December.
    17. Claudia Nardone & Rosanna Pittiglio & Filippo Reganati, 2025. "Italian firms’ trading behavior in the European carbon market," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 42(1), pages 297-337, April.
    18. Ren'e Aid & Maria Arduca & Sara Biagini & Luca Taschini, 2025. "Emission impossible: Balancing Environmental Concerns and Inflation," Papers 2501.16953, arXiv.org.
    19. Yoon, Beomseok & Filipski, Mateusz & Landry, Craig E. & Yoo, Seung Jick, 2024. "Endowment effects, expectations, and trading behavior in carbon cap and trade," Energy Economics, Elsevier, vol. 139(C).
    20. Huang, Zhehao & Su, Yaya & Zhao, Yuanqi, 2025. "Carbon emissions reduction: Crowding out or feeding back on corporate profitability?," Finance Research Letters, Elsevier, vol. 74(C).
    21. Simon Quemin, 2020. "Using Supply-Side Policies to Raise Ambition: The Case of the EU ETS and the 2021 Review," Working Papers 2002, Chaire Economie du climat.
    22. Flori, Andrea & Scotti, Francesco, 2025. "When the intensity of trading meets compliance requirements: An assessment for firms operating within the EU ETS," Energy Economics, Elsevier, vol. 147(C).
    23. Wang, Xinyu & Sethi, Suresh P. & Chang, Shuhua, 2022. "Pollution abatement using cap-and-trade in a dynamic supply chain and its coordination," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    24. Ma, Guangcheng & Yang, Yang, 2025. "Can China’s carbon market policy promote inter-city green collaborative innovation?," Energy Economics, Elsevier, vol. 144(C).
    25. Wegener, Christoph & Kruse-Becher, Robinson & Klein, Tony, 2024. "EU ETS Market Expectations and Rational Bubbles," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302359, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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