Why Do Emitters Trade Carbon Permits? Firm-Level Evidence from the European Emission Trading Scheme

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Firms thus face the decision whether to source compliance with the EU ETS within their boundaries or to acquire it through the permit trade. However, a combination of internal abatement, free permit allocation and flexibility to shift the use of their allocation across time creates opportunities to achieve compliance with the EU ETS without entering the permit trade. This paper aims to identify firm-level determinants of participation in and the extent of the permit trade while recognizing the possibility of zero trade flows leading to selection bias if unaccounted-for. We construct a firmlevel dataset incorporating transaction-level information from both EU ETS operator and person holding accounts, thus representing the entire system-wide permit trade by CO 2 emitters. We cover the supply and demand sides of the permit trade, both interfirm and intra-firm, and account for a wide set of firm-level characteristics using firms' balance sheet information. A detailed descriptive analysis documents salient features of the firm-level permit trade. We then jointly model firms' participation and amount decisions while allowing for possible self-selection into trading. Our results suggest that participation in the permit trade is driven by a combination of firm-specific factors existing independently of the EU ETS, such as size, sector and ownership structure, and market-specific characteristics resulting from the firms' inclusion in the EU ETS, such as the value of the firms' free permit endowment and their relative allowance position. We find that amounts traded are mostly driven by market-specific factors. Terms of use: Documents inIn contrast to the literature on the firm-level determinants of the general goods trade we do not find self-selection into trading.JEL Codes: F14, F18, Q54, C34

Winners and Losers of EU Emissions Trading: Insights from the EUTL Transfer Dataset

“…Coming back to the example of ability to predict future emissions, this could imply that such companies are both more likely to self-select into trading and to achieve higher potential gains. This appears to contradict the result reported by Zaklan (2013), who found no evidence of selection bias. However, he used a smaller sample of companies and estimated regressions for 2005 and 2006 separately.…”

“…I also confirm the previous finding that large emitters behave very differently from small emitters covered by the Scheme (Jaraite and Kazukauskas 2012;KfW/ZEW 2009;Martino and Trotignon 2013;Zaklan 2013). As large emitters are significantly more likely to engage in trading, they are also more likely to make gains from trading.…”

“…Zaklan (2013) modeled the decision to engage in trading, and the ensuing decision of how many permits to trade, as a Heckman two-stage selection problem. Jaraite and Kazukauskas (2012), on the other hand, interpreted a decision to trade 0 permits as an optimal decision that is taken simultaneously along with the quantity decisions and therefore created a corner solution model estimated via a double-hurdle model, which they considered as more appropriate.…”

“…On the one hand, the more accounts, the smaller the transaction costs to engage in trading, as a higher number of accounts may signify higher in-house trading capacity and lower search costs (Jaraite and Kazukauskas 2012). On the other hand, a larger number of installations may increase the possibility to abate and shift allowances internally, thus reducing the need to engage in inter-company market transfers of emissions (Zaklan 2013).…”

Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices

“…Given these results one would expect that the determinants of selling differ from the determinants of purchasing allowances. Through an extensive analysis on the trading of allowances, Zaklan (2013) shows that these determinants indeed differ. However, for some of the sales determinants in Jaraitė and Kažukauskas (2012), Zaklan (2013) finds notable divergent effects concerning, e.g., the allowance allocation size and the firms' turnover.…”