Exploring internal trading in the EU emissions trading system: An empirical analysis

For more than two decades, the European Emissions Trading System (EU ETS), has regulated greenhouse gas emissions across various sectors, including energy, manufacturing, aviation, and maritime industries within the European Union (EU) and beyond. The trading of EU allowances (EUAs) allows emission targets to be met in a cost-efficient manner. This study examines internal trading, i.e., trading of allowances between companies belonging to the same National Ultimate Owner (NUO). Using data from the European Union Transaction Log, the ORBIS database, and the European Energy Exchange, we analyse company-specific internal trading patterns from 2005 to 2017. Supposing that internal trading results in lower transaction costs than external trading (e.g., through intermediaries and exchanges), our findings indicate the presence of barriers to internal trading: Only a small fraction of companies with internal trading opportunities engage in such activities, leaving most of the potential for internal trading untapped. According to the findings from panel-econometric analysis, the relation between internal trading and trading potential is not statistically significant, providing no evidence that companies prefer internal to external trading.They further suggest that internal trading is positively correlated with the number of companies belonging to the same NUO, the number of regulated installations, and with trading frequency, and negatively with allowance banking, for example. These findings remain robust across diverse alternative model specifications, sample compositions, and identification strategies, including quasi-experimental methods.