Compliance Behavior in the EU-ETS: Cross Border Trading, Banking and Borrowing

Abstract

This paper exploits a little used data resource within the central registry of the European Union’s Emissions Trading System (EU ETS) to analyze cross border flows of allowances for compliance purposes during the first trading period (2005- 2007). The extent of cross border trading is small in the aggregate but remarkably frequent in matching allowance deficits and surpluses at the installation level throughout the EU. As such, these data provide evidence of the high and wide-spread market participation that is the precondition of efficient abatement in a cap-and-trade system. There is also remarkable little difference in the monetization of allowance surpluses between participants in the EU15 and those in the East European New Member States. Finally, comparison of these data with the more commonly reported data on allocations and verified emissions reveals considerable recourse to a novel feature of the EU ETS: borrowing from the next year’s allocation to satisfy current compliance requirements.