Back to the Future: A comprehensive analysis of carbon transactions in Phase 1 of the EU ETS

The European Union chose a market based mechanism, the European Union Emission Trading Scheme (EU ETS), as the main economic instrument for pricing greenhouse gas emissions in the energy intensive industrial sectors. Due to a five years regulatory delay, the data relative to all trades of carbon allowances during the first trading period (2005-2007) has only been available in its entirety since January 2013. This article is the first comprehensive analysis of the CITL data relative to carbon trades in Phase 1 of the EU ETS. This study focuses on three aspects of trading: the link between transfers of allowances and installations' compliance requirements, the intensity and frequency of trades at the account level, and the link with market exchange information (market exchanges volumes, values traded over time). We show that as expected, trades are primarily motivated by compliance obligations. Nevertheless our study reveals an extensive use of the time flexibility mechanisms (banking and borrowing of allowances) which are alternatives to trading. In particular, borrowing has been used at least by 25% of operators and involved large amounts of allowances, which has proved to be very economically efficient given the observed price over the period. The market participation has been quite high for large installations, especially in the energy sectors (power and heat, refineries), but remains low for smaller installations. Around 25% of installations did not participate to any trade. Finally, financial intermediaries and utilities trading desks seem to have been much more active than operators and have been actively intermediating trades: only 12% of the volumes traded took place directly between two operators. Nevertheless, volumes traded on market exchanges only represent a minor share of all allowance transfers. Even if all observed transfers did not have to be monetized, the value exchanged and the re-distributive effects induced are important. Whether these lessons are specific to the learning processes involved in Phase 1 or are a characteristic inherent to the system will not be known until Phase 2 transactions data is available. It is nevertheless essential to draw lessons from the past, in particular in the 2013 context of reforming the EU ETS. (authors)