Trading Costs for Futures in the European Union Emissions Trading Scheme

25 Pages Posted: 1 Jul 2009

See all articles by Andros Gregoriou

Andros Gregoriou

University of East Anglia

Jerome Healy

University of East Anglia

Date Written: May 29, 2009

Abstract

This paper is the first empirical study to focus on the role of liquidity for futures in the European Union Emissions Trading Scheme (EU-ETS). In this large and fast growing market with a global market value of $50 billion, liquidity is fundamental because it enables entities to trade quickly with small price impacts and meet their compliance obligations at minimum cost. We encapsulate liquidity by introducing a transaction cost parameter which is proportional to trading volume in a risk factor model based on the Capital Asset Pricing Model, in the futures markets in Phase I (2005-2007) of the EU-ETS. Our results show that trading costs are insignificant suggesting that the EU-ETS futures market is liquid. We believe that our findings could be due to an over supply of emission allowances in Phase I of the scheme, resulting in low proportional trading costs due to a reduction in trading volume.

Keywords: Emissions trading, Liquidity, Transaction costs, Futures prices

JEL Classification: G10, G12

Suggested Citation

Gregoriou, Andros and Healy, Jerome, Trading Costs for Futures in the European Union Emissions Trading Scheme (May 29, 2009). Available at SSRN: https://ssrn.com/abstract=1411610 or http://dx.doi.org/10.2139/ssrn.1411610

Andros Gregoriou (Contact Author)

University of East Anglia ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Jerome Healy

University of East Anglia ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

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