Seven respondents were involved in direct bilateral trade with counterparty and the other four participated in indirect trade through an intermediary. Respondents were asked what were the main reasons driving their choice to engage in direct or indirect trading $ ^{35} $ .

The causes of direct trading were mixed. Two respondents noted that trading volumes had been too small to trade via a third party, while another noted that not only had trading volume been too small, but also it had been cheaper to engage in direct rather than indirect trade. Another respondent noted that it traded directly because it wanted to learn how to trade. Another company noted that there had been no need for it to engage a third party in trading, as it owned a single installation with a small allocation and direct trading was not a complex process. This over-compliant respondent noted that its strategy had been to comply with EU ETS targets on an on-going basis; it had not considered allowances to be financial instruments regardless of it surplus position.

Three companies chose indirect trading because they had no in-house trading capacity and because indirect trading was a quicker process than direct trading. One over-compliant respondent in the power sector added that indirect trading was chosen as it provided a transparent process for cost pass-through into marginal production cost. In addition, he added that low brokerage fees, which declined along with the allowance price during the first trading period, made indirect trading an attractive option. According to an earlier survey by Convery and Redmond (2007) brokerage fees per tonne of $ CO_{2} $ traded declined from €0.10 in January 2005 to €0.06 in August 2006.

Based on this analysis regarding traders and non-traders, we conclude that the transaction costs associated with trading were not determining in firms' decisions whether to trade or not. The decision to use allowances for compliance only, and the low allowance prices at the end of the first trading period seem to be the primary reasons why firms did not sell their surplus allowances during the pilot phase. These findings are consistent with those of Trotignon and Ellerman (2008) who analyse the compliance behaviour of direct participants of the EU ETS, who conclude that there was an asymmetry in behaviour in that those who were short were active in the market, while those who were long were much less so.

### 6. Conclusions and policy implications

This study reveals the importance of a comprehensive approach to assessing transaction costs. The assessment of all sources of transaction costs is especially important in the early stages of any pollution-trading programme. As a portion of transaction costs is inevitably of administrative nature which depends on the scheme’s design, the total transaction costs assessment should be made well before any corrections on the scheme design are implemented. Nevertheless, this does not suggest that this comprehensive approach should be abandoned in the course of the programme. Tietenberg (2006, p.205) argues that “since evolution is so common for emissions trading, a strong case can also be made for thinking of mid-course correction as routine”.