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Working paper / Climate

EU Emissions Trading by Energy Firms

Author(s): JONG Thijs, ZEITLBERGER Alexander

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ABSTRACT

This paper aims to identify what determines the allowance transactions of energy firms on the European carbon market (EU ETS). We develop measures of their 'autarky' regarding the carbon market, their allowance hedging, and the allowance holdings which ensure optimal EU ETS compliance. Although under-allocated over Phase I, energy firms held more allowances than needed. By selling allowances, only the non-autarkic firms followed their optimal compliance holdings and, hence, actually behaved autarkical. Autarkic firms, conversely, purchased more allowances than they needed. Moreover, and unlike non-autarkic firms, their allowance trades were responsive to energy demand and indicative of carbon hedging. Finally, all energy firms utilized the carbon market's abatement potential, which affirms that the EU ETS leads to relative cost savings. As especially autarkic energy firms utilized this potential, and may have reaped additional savings from their active hedging, they behaved least autarkical regarding the carbon market.