Offset Credits in the Eu Emissions Trading System : a Firm-level Evaluation of Transaction Costs
Abstract: International offset certificates trade at lower prices than European Union Allowances (EUAs), although they are substitutes within the EU Emissions Trading System (EU ETS) for CO2. Firms therefore had a strong incentive to use the cheaper certificates up to the maximum quantity fixed by the regulator. However, a considerable number of firms did not use their offset credit entitlement and, by doing so, seemingly forwent profits. While most of the literature on emission trading evaluates the efficiency of regulation in a frictionless world, firms in reality incur managerial costs when complying with regulation. This study examines the use of international offset credits in the EU ETS, in order to assess the relevance of such managerial and information-related transaction costs. It establishes a model of firm decision under fixed entry costs and estimates the size of transaction costs rationalizing firm behavior using semi-parametric binary quantile regression methods. These costs appear to be sizable, as they prevent a fifth of all firms, especially small emitters, from using offset certificates. It appears that for most firms the bulk of these transaction costs stems from participation in the EU ETS in general, rather than additional participation in the offset trade.
