Permit trading , financial intermediaries , market power
Abstract:
This paper examines the role of intermediaries in quantity regulation theoretically and presents
a data application to the EU Emissions Trading Scheme (EU ETS). The choice of regulated firms
to trade permits through intermediaries or directly at the exchange is discussed. Permit pricing
strategies of intermediaries and possible issues of market power of intermediaries are modeled.
Based on empirical data, the model application aims to assess the actual costs (fees, fixed
costs) from permit trading, which represent costs of transacting. In a competitive setup, costs
are relatively modest with about 1% to 2% of the permit price. In the EU ETS, firms that trade
more than 283,000 tCO2/year are likely to directly access the exchange while others trade with
intermediaries. In the unlikely event of an intermediary having market power, overall costs
would be six times higher in the model application. Options for regulated firms to access a
permit exchange directly at low costs decrease the costs of transacting considerably in a competitive
and non-competitive intermediary market.
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