Abstract
The EU Emissions Trading Scheme (EU-ETS), the major policy tool of the EU for achieving its Kyoto target, is the largest pollution permit market in the world. Following the lessons learned from the trial phase (2005-2007), new measures were adopted for the Kyoto commitment period (2008-2012) in order to enhance market quality, thereby reducing emissions. This study explores liquidity effects after the introduction of the new regime of rules for Kyoto commitment period. It finds evidence of a sustained increase in the liquidity of the carbon permits as a result of the new trading rules. However, we also find evidence of reductions in liquidity following regulatory changes after the commencement of the current phase.
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