In this paper, the role of intermediaries, e.g. banks, under quantity based regulation with tradeable permits is examined. An example is the EU Emissions Trading Scheme (EU ETS). In the EU ETS, the total amount of eligible greenhouse gas emissions is fixed in a certain period of time and must not be exceeded. Per unit of emissions, one permit is assigned. Regulated firms are free to trade these permits on the open market, which allows achieving the environmental objective of not exceeding the total amount of emissions in an economically efficient way.

Trading of emissions permits is often arranged by intermediaries. Surveys amongst German companies regulated by the EU ETS showed, that most companies trade permits with the help of intermediaries instead of directly becoming active at the exchange. Direct trading at the exchange is mostly done by larger emitters. This paper first examines the choice of regulated firms to trade with intermediaries or directly at the exchange. In a second step, pricing strategies by intermediaries are discussed with a special focus on the possibility of monopolistic or monopsonistic pricing. The model shows that there is no chance for monopolistic or monopsonistic pricing by intermediaries if there are at least two non-colluding intermediaries in the market. A model of monopsonistic pricing for the case of a single intermediary in the market is discussed in detail.

Model applications, based on empirical data and official compliance data form the EU ETS in Germany show that under a competitive situation, the fees charged by intermediaries for permit trading services are rather small (less than 2% of the value of traded assets). Total costs for trading of allowances in the case of a single non-competitive intermediary are assessed to be six-times higher than in the competitive setup. For the EU ETS it can be concluded that there is no reason to expect monopolistic or monopsonistic pricing by intermediaries.

Authors

Heindl, Peter

Keywords

permit trading; financial intermediaries; market power