Trading of Emission Allowances and Financial Frictions

81 Pages Posted: 23 Sep 2022 Last revised: 15 Aug 2023

See all articles by Donald N'Gatta

Donald N'Gatta

University of Navarra, IESE Business School

Gaizka Ormazabal

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Robert A. Raney

IESE Business School; University of Washington

Date Written: August 14, 2023

Abstract

This paper examines the role of financial frictions on the trading of emission allowances. Our tests are based on a wide international sample of firms and data from the European Union Emission Trading System (EU ETS), which is the most liquid and developed in the world. We find evidence consistent with the notion that key features of the ETS (i.e., supply of allowances, compliance period, disclosure of transactions) combined with the current accounting for emission rights induce firms to sell emission allowances for financial reasons unrelated to compliance with environmental regulation. We observe more frequent selling of allowances when the transactions are likely to provide a liquidity and/or a reporting advantage (i.e., boosting earnings to avoid accounting losses). Additional tests suggest that the documented trading activity affects the functioning of the ETS; it is associated with deviations from standard compliance behavior, more selling intensity, and temporary effects on carbon pricing. Our results have implications for the debate on the institutional design of carbon markets.

Keywords: Financial frictions, Emission Trading, Emission Allowance, Pollution Pricing

JEL Classification: M10, M41, Q50

Suggested Citation

N'Gatta, Donald and Ormazabal, Gaizka and Raney, Robert A., Trading of Emission Allowances and Financial Frictions (August 14, 2023). IESE Business School Working Paper , Available at SSRN: https://ssrn.com/abstract=4216364 or http://dx.doi.org/10.2139/ssrn.4216364

Donald N'Gatta

University of Navarra, IESE Business School

Gaizka Ormazabal (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Robert A. Raney

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 679470669 (Phone)

HOME PAGE: http://www.iese.edu

University of Washington ( email )

Seattle, WA 98195
United States
2067550125 (Phone)
2067550125 (Fax)

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