EU Emissions Trading by Energy Firms

Abstract

Do energy firms depend less on the EU carbon market (EU ETS) when they are better able to pool their in-house pollution abatement potential? Expected is that cost-minimizing firms behave self-sufficiently by allocating production, emissions and, hence, allowances within firm boundaries. Therefore, the allowance trade of more self-sufficient firms on the carbon market is expected to be less responsive to allowance demand factors, by being better able at absorbing shocks within the firm. Contrary to our expectations, we find that self-sufficient firms conducted less allowance trade across their subsidiaries than on the carbon market. Pollution abatement capacity outside firm boundaries may therefore be less expensive and/or more cost-effectively coordinated through the market. We also find that self-sufficient firms actually purchase during electricity demand declines, and with higher coal and/or lower gas prices, and vice versa. These opposing findings point to allowance hedging. This conjecture is reaffirmed since we found their trades to be systematic repurchases and resales (instead of unidirectional trades) and to be responsive to market arbitrage opportunities. Besides the hedging against carbon risks, the cost savings by applying external abatement options suggest that self-sufficient firms actually depend more on the EU ETS market than less self-sufficient firms do.