Transaction costs of firms in the EU ETS

This paper is a first attempt to empirically measure transaction costs – a composite of administrative costs and trading costs – of firms in the European Union's CO2 Emissions Trading Scheme (EU ETS) during its trial phase (2005-2007). This analysis provides some evidence that transaction costs of firms were mainly of administrative nature. There are also remarkable economies of scale, with the costs per tonne of CO2 lower for participants with larger allocation. The composition of these costs diverges too as the share of early implementation costs tend to be significantly larger emitters. Trading transaction costs were not significant and, hence, trade prohibitive and other factors – self-sufficiency in compliance and low allowance price – played a major role in deciding whether to trade or not during the trial trading period.