Transactioncosts can decrease the economic efficiency ofemissionstrading systems substantially, especially if they cause irregular cost burdens among regulated companies. The attention for transactioncosts in theEUEmissionsTradingSystem (EU ETS) has increased in recent years. So far, the literature principally focuses on transactioncosts for allowance trading, while theimpactofadministrativetransactioncosts is underexposed. Administrativecosts occur as a result of mandatory compliance obligations, i.e. monitoring, reporting, and verification of annual emissions (MRV). Accurate reporting and a verification ofemissions are indispensable for the proper functioning ofemissionstrading programmes or carbon taxes. Hence, administrativecosts for MRV are to some degree unavoidable. Recognising the importance of accurate MRV for the proper functioning of systems, such as theEU ETS, the next question to ask is if administrativecosts, among other things, should be regarded as an important issue for policy design. Thus, there is a trade-off between aspects of MRV transactioncosts on the one hand and necessary MRV obligations on the other hand. Both aspects need to be considered for the design ofemissionstrading systems.
It should be noted, however, that this effect crucially depends on the assump- tion of perfect competition, which implies that windfall profits do not persist. Perfect competition leads to zero profits, i.e. cost savings through grandfathering reduce average costs throughout the respective ETS sector. In this setting, free allocations of emission permits effectively become a side payment to the sector which attracts new competitors. As a result, sectoral output increases and prices fall until zero profit holds for the sector. In contrast to this, grandfathering in combination with market power leads to windfall profits. Under the assumption of perfect competition / zero profit, the positive sectoral effects take the form of increased output rather than increased profits. It is important to note that the welfare implications of grandfathering would be less favorable under imperfect competition.
In theory, theemissions market should be a cost-effective mechanism that equates the marginal cost for meeting the carbon target across regulated entities, ensuring that emissions sources that can reduce emissions at least cost within a given compliance period will do so. Further, the ability to bank allowances is supposed to ensure that cost-effectiveness is achieved over time. Another attractive aspect of a cap-and-trade policy is that the regulator has instantaneous information about marginal cost, summarized in the allowance price. However, in practice, the value of price discovery is limited: overlapping policies and other factors interfere with the market and drive a wedge between the apparent and actual costs. For example, theEU Renewable Energy Directive forces more clean electricity generation to be implemented than would be cost-effective with carbon pricing under the ETS alone. By directing the market to reduce more emissions via relatively expensive renewables, less abatement will be done via other, less costly methods, leading allowance prices to fall. As a result, the actual costsof meeting theemissions target are higher while the allowance price is lower. 13
demand on markets. Reduction efforts by companies are not defined by the regulating authority as under a command and control regime. Hence, liquid and transparent markets are of great importance. Transparency in markets (about prices and traded volumes) is beneficial as it provides information to all market participants. In the US SO2 trading program, prices for private transactions were unknown to others and hence assessing a “fair” price was accomplished with relatively high informational costs. The market was not very liquid meaning that finding a potential seller/buyer was accomplished with search costs. These factors lead to relatively high transactioncosts in general and hampered the efficient exchange of permits and the efficiency oftheemissionstradingsystem as such. Since the price is generated at primary auctions or sells (initial permit allocation by authority) and at secondary markets (exchanges over the counter trade), liquidity and transparency within the market is crucial for minimizing transactioncosts and facilitating efficient exchange of permits. Allowing intermediaries to be active in permit trading can play a crucial role here. Also markets for machinery and equipment to achieve emissions reductions can be of importance. While in the case of SO2 trading, retrofitting of existing plants to reduce emissions was relatively easy, technical solutions for the reduction of CO2 are more complex because ofthe non-existence of end-of-pipe technologies for CO 2 emissions. If markets for energy efficient machinery and equipment are sticky, transactioncosts can hamper the effective transformation ofthe economy (Heindl, 2011).
to other reforms.
In any case, our empirical results have to be taken with care since our carbon pricing policy designs are very stylized. In practice, it would be very hard to monitor how much emissions may be shifted from the ETS to the non-ETS sector or retired due to the price floor. Moreover, there exist huge sectoral differences in abatement costs within the ETS and non-ETS sectors (recall Figure 3, Appendix C). Thus, potential efficiency gains very much depend on whether the additional tax is levied on coal-fired power plants in the electricity sector or on rubber production plants in the chemical sector. Policymakers may increase abatement targets in ETS sectors that face high marginal abatement costs but relax targets in non-ETS sectors that face low marginal abatement costs which may even result in efficiency losses. Analogously, regarding the efficiency analysis of policy 2 it also depends on which sectors are taxed and thus, how many emission allowances will be retired.
This diﬀerentiated identiﬁcation of corporate structures across the universe of ﬁrms subjected to theEU ETS is essential to address our research question. Due to their speciﬁc organizational structure, only global multinational enterprises with existing ﬁrms inside and outside ofthe regulated area may possess the opportunity of a gradual reaction at rather low relocation costs. If relocation takes place on an important scale via this channel, we should observe asset erosion for these ﬁrms or at least no substantial increases in the asset base. We argue that the cost barrier for a relocation of economic activity should be lowest within global business groups that comprise, regarded from the viewpoint of a speciﬁc ﬁrm subject to theEU ETS, at least one ﬁrm that operates in the same sub- sector but is located outside ofthe regulated area. In principle, this would allow for a simple shift of production between already existing ﬁrms. We therefore designate the ﬁrm in a business group as global MNE with functional link. In contrast, we denote a treated ﬁrm as belonging to a global MNE without functional link if the business group is indeed spread across regulated and unregulated countries but lacks ownership of a sectoral sibling outside oftheEU ETS.
These ﬁndings show that theEU ETS has eﬀectively reduced GHG emissions in the regulated sectors without incurring substantial competitiveness e ﬀects. Put diﬀerently, ﬁrms abated emissions without those abatement activities showing up negatively in competitiveness. Most likely, the design ofthe scheme so far (over-allocation, mostly for free) has prevented the negative e ﬀects for ﬁrms on average. While this is good news for the current level of European competitiveness, could this mean short-term gains for long-term pain? A low carbon price undermines incentives for early investments in low-carbon technology and could a ﬀect the system’s dynamic e ﬃciency (minimization of long run abatement costs). Therefore, negative competitiveness eﬀects may just arise later, when more ambitious abatement will be required. At the same time, Vailles et al. (2017) argue that in Phase IV, energy e ﬃciency and renewable energy policies will enable emissions reductions that are already su ﬃcient to meet theEU ETS target. Finally, other elements suggest that ﬁrms would be capable of absorbing higher carbon prices, as demonstrated by their ability to pass costs onto consumers and due to the low burden of energy costs on average. Therefore, we conclude that strong negative e ﬀects on competitive- ness under the current and near-future design ofthe scheme are unlikely. In consequence, this means that pol- icymakers need not implement further relief for the average regulated ﬁrm.
This paper is an empirical investigation ofthe role ofthe financial sector in theEUEmissionsTrading Scheme (EU ETS). This topic is of particular interest because non-regulated entities are likely to have played an important part in increasing the efficiency oftheEU ETS by reducing tradingtransactioncosts and providing other services. Due to various reasons (new rules and regulations, reduced return prospects, VAT fraud investigations) banks have reduced their engagement in EUEmissionsTrading and it is unclear how this will impact on the functioning ofthe carbon market. Our regression analysis based on data from theEUTransaction Log shows that large companies and companies with extensive trading experience are more likely to interact with the financial sector, which is why we expect banks’ pulling out oftheEU ETS to affect larger companies more significantly. The semi- structured interviews we conducted with representatives ofthe financial sector, as well as companies liable under theEU ETS, confirm that banks were involved in theEU carbon market in various capacities, specifically as hedging partners for larger companies in the energy sector. Whether this particular role may be taken on by other financial players is unknown at this stage.
integrate into the world tradingsystem and in meeting the new obligations that are expected to arise from a WTO trade facilitation agreement.
The amount of foreign aid involved is by no means small. Between 2002 and 2008, donors’ total Aid for Trade disbursements amounted on average to 19.3 billion US$ (constant 2008 prices), a share of around one third of sector allocable Official Development Assistance (ODA) (OECD 2010). Up to and during the WTO Ministerial Conference in Hong Kong in 2005, donors pledged to increase AfT. The European Commission and EU Member States pledged an additional 2 billion Euros a year by 2010, the United States promised to double aid to 2.7 billion US$ by the same year, and Japan pledged to provide 10 billion US$ over 3 years (OECD and WTO 2007). According to the OECD and the WTO (2009), donors are on track to meet or have already met their pledges. Furthermore, it can be expected that the relative share of AfT in overall ODA is going to increase over the medium term.
An expanded variant would be the introduction of a price corridor for the traded allo- wances to reduce the uncertainty ofthe market participants (Koch et al 2014: 678). In this way, the certificate prices – as well as the abatement costs – would have a range with a fixed upper margin and a fixed lower margin, to be determined by policy. An essential feature ofthe price corridor is that the existence of a maximum price, which emerges with high demand and great scarcity, leads to an emission level that exceeds the pre- viously fixed upper margin. But since the price now cannot exceed the previously laid threshold, businesses will not make further prevention efforts when abatement costs are over the thresholds; instead, they will demand allowances. If the gap between demand and supply cannot be closed through higher prices, then more allowances will need to be made available at a fixed price. As a result, maximum price functions like an increase ofthe permitted upper margin.
is currently covered by the scheme and they also included aviation sector, although with some limitations. The aviation sector is covered only partially, that is, the policy applies only for flights within European Economic Area (EEA). This is set to last until the 31. December 2023 (Ellerman et al. 2014). Another very important issue affecting the ecological accuracy ofthe ETS is the carbon leakage. Carbon leakage is an important factor when considering unilateral environmental policies, such as EU ETS. When a country (or region) imposes certain emissions constraints, this can cause theemissions simply to shift from that region to another where the constraint is not present, therefore putting the initial goal ofthe policy into question. The source ofthe leakage stems usually from increased production costs for domestic produces (from regulated area) who must compete in the international market with producers who have lower costs due to the absence of such regulation (Naegele and Zaklan 2019). Under the hypothesis that leakage can be measured through changes in trade flows, Naegele and Zaklan (2019) did an empirical analysis and found no evidence ofEU ETS causing carbon leakage in the affected European manufacturing sectors. Bayer and Aklin (2020) estimate that the scheme was responsible for emissions reductions of 1.2 billion tons of CO 2 from 2008 to
tioning of European allowances and international offset credits, particularly since both types of credits are trad- ed on the same platforms.
Transactioncosts can therefore be divided into two com- ponents: costsof active participation in theEU ETS in general and specific costs for participating in the trade of offset credits. An estimate of these two cost compo- nents using a quantile regression shows that the fixed transactioncostsof general participation in theEU ETS predominate for most companies. If a company is al- ready taking part in thetradingsystem, the extra costs for trading in offset credits are usually low. The average estimated cost is considerably higher than the median: a large number of companies have moderate fixed transac- tion costs, while the few companies that have not taken up large offset entitlements have driven up the average. The fixed costsof actively participating in theEU ETS are therefore more of a problem for small emitters. If it is not worthwhile for small enterprises to take part in theEU ETS due to high fixed transactioncosts, this leads to different-sized companies being treated unequally. This creates inefficiency, since the incentives for small firms do not depend entirely on the price they have to pay for their emissions.
A commission is the amount of money paid to the brokerage firm for its services, including investment advice and execution ofthe investors’ orders on thetrading floor ofthe exchange. Normally such costs are negotiable. Additionally the brokerage firm may charge for transfers of cash to the bank and for holding the account. Fees charged by an institution that holds the securities in safekeeping for an investor are called custodial fees and costsof transfer ofthe ownership over a stock are referred to as transfer fees. The buyers and sellers do not trade directly, in Poland for each transaction there are simultaneously three intermediaries: the brokerage house which operates thetrading account, the stock exchange which organizes and regulates the market and the institution responsible for the management and supervision ofthe depository, clearing and settlement system to enable thetradingof financial instruments (Krajowy Depozyt Papierów Wartościowych). In practice all payments for those services are charged by the brokerage which shares them with the remaining two institutions. In a given range oftrading values the commission is proportional to the value ofthe trade, with a usually added condition that it can not be lower than some minimal cost. The commissions also depend on whether an order is placed personally, by telephone or through the Internet. Commissions vary widely from brokerage to brokerage. The web portal Bankier. pl published the rank of brokerage firms operating on the Polish stock market (Retrieved from: http://www. bankier.pl/wiadomosc/Ranking-rachunkow-maklerskich- 1-kwartal-2014-3063196.html). The ranking list was established on January 2014 and 21 brokerage houses
sector (1A1) amounted to 12.8 Mt, CO 2 emissions from fossil
fuel combustion in industry (1A2) to 14.23 Mt amounting to a total of 27.03 Mt. CO 2 emissions from industrial processes
were at 3.47 Mt, (UNFCCC 2004: 15, 19). One can therefore estimate that almost every installation ofthe two sectors af- fected by emissionstrading fall under theEU ETS. Moreo- ver, Slovakia is planning to introduce a complementary national emissionstradingsystem from 2008 onwards which is going to cover part ofthe installations not covered by theEU ETS (Slovak Republic 2004: 8). One can therefore con- clude that nearly all the theoretical JI potential in the energy and industrial sector is going to be covered by one or the oth- er form ofemissionstrading.
rise and dominance of neoliberalism and the international climate action under the UN are investigated.
4.1.1. The rise and dominance of neoliberalism
According to David Harvey, neoliberalism is a “theory of political economic practices” which assumes that the welfare of human beings can be best reached by individual entrepreneurial freedoms within a context of strong private property rights, free markets and free trade (Harvey 2005: 2). The state‟s role is to set up institutions which create and secure this institutional framework and to ensure the orderly functioning ofthe markets. In fields where there are not yet markets, like in education or environmental pollution, the state should create them. However, the state should not intervene in already existing markets (Harvey 2005: 2). Neoliberalism uses the neoclassical economic theory as „scientific‟ legitimation for the laissez-faire ideas (Bresser-Pereira 2010: 7). This macroeconomic theory is based on the concept ofthe „homo economicus‟, which means that consumers as well as producers are acting rationally as they always aim to maximise their own benefits or profits (Rogall 2013: 74). Within the transactions all actors have the relevant information fully available in order to make the right decisions (Rogall 2013: 75). A further main assumption ofthe neoclassical economic theory is that humans are always acting in their best interest, which in total results in the best for the society (Rogall 2013: 75 f.). Government interventions are rejected by this theory as through prices, wages and rents markets automatically reach a balance. Thereby, it is assumed that all costs and benefits are included in the calculations ofthe market participants. This means that there are no external effects and also no overuse of goods or production factors. The central assumption is that an undisturbed market economy without governmental interventions will lead to welfare for the whole society (Rogall 2013: 79 f.).
baseline scenario EU integration implies for wheat 44 percent lower prices, 5 percent lower production, and higher domestic demand and imports.
While there is a large body of literature on spatial market integration especially in developing countries, the integration among the Turkish provinces' agricultural markets has not been investigated so far. Inter alia, grain markets have been analyzed in China by Park et al. (2002) and in Ethiopia by Getnet et al. (2005), rice markets in Vietnam by Lutz et al. (2006), and maize markets in Ghana by Abdulai (2000). Rapsomanikis et al. (2003) provide an overview of spatial market integration among cash crop markets of developing countries. All these studies investigate the price transmission process while not accounting for the fact that transactions involve costs. For example, trade is associated with significant costs for information collection, communication, risk coverage, and finally transportation ofthe physical goods. Recently, Barrett (2001) and Barrett and Li (2002) criticize market integration studies based on price data exclusively for the neglect oftrading behaviour by disregarding actual trade flows and transactioncosts. In a comparison of several methods to analyze spatial market integration, Fackler and Goodwin (2001) identify the omission oftransactioncosts from the model approach as the most serious factor influencing the validity of empirical test on market integration. Tackling this, Balke and Fomby (1997) propose a threshold error correction model to account for transactioncosts. This work triggered a number of studies, e.g., by Lo and Zivot (2001), Goodwin and Harper (2000), and Goodwin and Piggott (2001),identifying significant transactioncosts in market integration. Brosig et al. 2007 observe a decrease oftransactioncosts over time in Northeast China’s soy bean markets suggesting improvement of market conditions.
that recently planned national measures that overlap with theEU ETS will have only a negligible impact on aggregated emissions. In times of low interest rates, however, it is likely that the cap ofthe MSR is binding. If this is the case, an increase in the size ofthe bank caused by a national measure may directly translate into an almost one-to-one increase of cancellations. In times of high interest rates, a national measure has a strong impact on the aggregate bank. This increase in the bank, however, may not lead to a significant increase in cancellations because in such times it is unlikely that the cap is binding. A precise analysis of these effect requires an exact modeling ofthe cancellation mechanism. Due to the complicated rules ofthe CM, this cannot be analyzed analytically.
A first insight on the correlation of CO 2 pricing and product prices may be gained from a simple graphical illustration ofthe development of CO 2 and of output prices, e.g. placing CO 2 price trends on the x-axes and product price trends on the y-axes of a chart. While this approach seems straightforward for the electricity sector (with information on daily or hourly spot market prices available), it provides a major challenge for sectors other than electricity. No single price index exists for products that are much less homogenous than electricity. Rather, for most industries, each product has its own market price that may or may not be affected by theEU ETS. Optimally, each of these prices would need to be correlated to CO 2 prices in order to assess theimpactoftheEU ETS. Such an analysis would, thus, require collecting a vast amount of product price data, which most often is not publicly available. Alternatively, aggregate price indices may serve as proxies. However, these data are often reported on an annual basis only and would not provide sufficient data points to perform a correlation analysis. For some products, quarterly and/or monthly data may be available. Apart from the problems associated with the collection of prices on manufacturing products, a correlation analysis would face another important set of challenges. First and foremost, a simple correlation of product prices and CO 2 costs would most likely not provide statistically significant conclusions. A number of simultaneous reactions may lead to changes in product prices which would not allow to single out a CO 2 price based effect. A time series regression would perform well if the main explanatory variables were included. This implies that prices for all variable inputs to production (energy prices, intermediate input prices etc.) would need to be included. In addition, changes in product prices may be driven by developments outside oftheEU ETS system boundary. High steel demand from China, for example, affects international steel prices and provides a parallel and exogenous driver of product prices in the European Union that would need to be separated from CO 2 based price effects.
COMPUTATIONAL STRATEGY.—– Based on Mathiesen ( 1985 ) and Rutherford ( 1995 ),
we formulate the model as a mixed complementarity problem (MCP). We formu- late the model as a systemof nonlinear inequalities and represent the economic equilibrium through two classes of conditions: zero profit and market clearance. The former class determines activity levels and the latter determines price levels. In equilibrium, each of these variables is linked to one inequality condition: an activity level to an exhaustion of product constraint and a commodity price to a market clearance condition. Importantly, the complementarity-based formulation of our numerical model enables us to endogenously represent corner solutions in equilibrium; for example, as will become evident below, it is important to ac- count for the possibility of “unbinding” national (non-ETS) carbon markets with zero carbon prices. Numerically, we use the General Algebraic Modeling System (GAMS) software and the higher-level language MPSGE ( Rutherford , 1999 ) and the PATH solver ( Dirkse and Ferris , 1995 ) to solve the MCP problem.
Starting with transaction data, the core problem I had to face lies in its incompleteness – in total, 101,858 or 10,2% of 994,280 transactions recorded from January 2005 to April 2017, all of which were performed between accounts ofthe same registry, lack information on at least one ofthe parties involved. Fig. 4.2 gives an impression ofthe magnitude of this effect. In absolute numbers, 15.5% of transactions completed during phase I&II exhibit missing values, which translates to 35.5% ofthe total transaction volume. Of all insufficiently labeled transactions, 34.0% alone were issued by UK accounts, whereas another 18.9% originated from Italy. The regional distribution ofthe remaining transactions, however, is more in line with the average transaction volumes of each member state during phase I&II. For another 4,568 transactions, information on both the acquiring and the transferring accounts is missing. Interest- ingly, the majority of these – 62.1% and 26.8% – originate from Austrian and Greek accounts. Further 3.5% were transferred from EU accounts, whereas the remaining national registries play only a minor role. However, it is worth mentioning that all of said gaps in the dataset are limited to dates ranging from 2005 to 2012. The causes of these irregularities are subject to speculation – neither literature nor the EUTL website give a clear indication as to why such a large proportion ofthe dataset is incomplete. Hence, it remains unclear wether the loss of data has occurred during the transition process from a national administrative structure to the current EUTL or if the data collected by the national agencies had been incomplete in the first place. Apart from these corrupted entries, there are another 35,400 transactions involving accounts outside theEU ETS as well as CDM accounts, which also lack information on one ofthe parties involved. However, this does not constitute an irregularity, since the EUTL keeps no records of market participants not registered by thesystem.