Saturday, March 15, 2014
Congressional B (Omni Shoreham)
One of the main policy initiatives by the EU in recent years has been the EU Emissions Trading Scheme (EU ETS), the world’s largest regulatory program for greenhouse gas emissions. The EU ETS is part of the European Union’s commitment to addressing the problem of climate change and due to its large scale and comprehensive emissions targets the program is expected to stay in place well beyond 2020. Through the creation and distribution of emissions permits, regulators in the EU ETS have created a substantial market for emissions allowances. This paper examines how efficient these emissions permit markets have been and how firms strategically use different types of emissions allowances for compliance with the program. Utilizing a panel dataset on firms in the Iron and Steel sector in the European Union, I show empirically that multinational firms are more likely to exploit existing price differentials in these carbon markets. Through this arbitraging behavior, they are able to use the regulatory program to capture surplus rents and gain an advantage over their domestic competitors. My results also indicate that the likelihood for firms to seize this arbitrage opportunity increases over time across all firms. This paper contributes to our understanding of the efficiency of European carbon markets and provides valuable insights for the future design of regulatory programs such as the EU ETS.
