In this paper, transaction costs in the EU emissions trading scheme (EU ETS)
are examined empirically based on survey data from German companies.
Transaction costs from measurement, reporting and verification (MRV) of
emissions, permit trading and general informational costs are considered.
Transaction costs from MRV and permit trading are of non-linear form and
dependent on annual emission and trading volumes based on OLS and nonparametric
estimation. As a consequence of non-linear transaction costs,
welfare losses occur compared to a first-best setup under zero transaction
costs. In practice, smaller emitters will emit less (abate more) compared to
larger emitters and vice versa due to economies of scale in the management of
emissions trading. The results further imply that optimal firm size might be
influenced by transaction costs in the EU ETS because of relatively high
average transaction costs amongst smaller emitters. Overall annual transaction
costs in the EU ETS in Germany are estimated to be EUR 8.7 million.
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