Transfer patterns in Phase I of the EU Emissions Trading System: a first reality check based on cluster analysis.

In 2005, the world's largest Emissions Trading System (ETS) was introduced in the EU. Economic theory assumes high efficiency of such market-based instruments since companies have the flexibility to trade allowances. However, to date there is a lack of understanding on how companies have participated in the allowance markets. This article uses data on transfers of allowances between 2005 and the end of 2007, published by the EU in the Community Independent Transaction Log (CITL) after a five-year delay. We use cluster analysis to detect patterns in the data and differentiate transfer behaviour. We find that the vast majority of participants (7212 accounts) are rather passive in terms of transfers. Of these, more than half are hardly participating in the market at all, whereas one-third are accounts managed by another account belonging to the parent company. Opposed to that, 143 accounts show more active, but relatively diverse transfer behaviour. We also identify differences in sectoral representations, account types, and primary allocation across the seven clusters. While the passive accounts mostly belong to installations regulated under the EU ETS, the most active accounts are classified as ‘non-regulated account type'. Our findings have implications for policy makers in the EU as well as other countries that have or are setting up an ETS. The high number of companies not or hardly participating in the allowance market despite being regulated under the EU ETS puts the theoretical praised economic efficiency of this instrument in question. This finding also implies that policy makers should reconsider the entry thresholds for firms into an ETS. At the same time, some of the most active accounts belong to non-regulated firms, such as banks, which calls for better market oversight or potentially restrictions on ETS participation. Finally, we recommend that the timeliness and user-friendliness of CITL should be increased. [ABSTRACT FROM AUTHOR]