Emissions trading with transaction costs

We develop an equilibrium model of emissions permit trading in the presence fixed and proportional costs which price firms' participation extent are endogenously determined. analyze sensitivity to changes allocations, characterize situations where depress or raise prices relative frictionless market conditions. calibrate our annual transaction data Phase II EU ETS (2008–2012) find that order 10 k€ per annum plus 1 € traded substantially reduce discrepancies between observations theoretical predictions for firms’ behavior (e.g. autarkic compliance small and/or long firms). Our simulations suggest ignoring leads underestimation impacts supply-curbing policies, this difference varying with incidence on firms.