Transaction costs, market structure and efficient coverage of emissions trading scheme: A microlevel study from the pilots in China

Abstract Regulators need to pay attention to the negative effects of the transaction costs when they define the reasonable coverage of the emissions trading scheme (ETS). In addition, the market structure in the ETS also needs to be considered in the market efficiency evaluation, as most covered firms come from industries with high market concentration. This paper incorporates transaction costs (monitoring, reporting and verification (MRV) costs and trading costs) and market structure into a partial equilibrium model to study their effect on the reasonable coverage of the ETS. A database of the 1867 industrial firms included in the ETS pilots in China is established for the case study. It is found that the MRV costs become the main factor of the breakdown in efficiency of the ETS. However, there seems to be no inherent relationship between the market structure and the efficient coverage of the allowance market. The policy implications derived from the case study can provide useful references for the upcoming national ETS in China.