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arXiv · 2408.06497

Inefficiencies of Carbon Trading Markets

Nicola Borri·Yukun Liu·Aleh Tsyvinski·Xi Wu
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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 year. 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.

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Nicola Borri, Yukun Liu, Aleh Tsyvinski, Xi Wu. 2024-08-12. Inefficiencies of Carbon Trading Markets. https://arxiv.org/abs/2408.06497

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