arguments, Rao (2003) suggests that it is enough to consider only those components of transaction costs which are not common to alternative policies. We adhere to the latter approach.

Krutilla (1999) argues that in the environmental economics literature, the area of transaction costs is relatively unexplored. Transaction costs are not taken into account in most studies on the governance of the global commons (Ostrom, 1990).

As mentioned above, Stavins (1995) studies the potential impacts of trading transaction costs on pollution trading. Within his theoretical framework, he shows that, in the presence of these costs, the efficient equilibrium of the trading systems might be undermined (decrease in the volume of permits traded), and, that the market equilibrium depends on the initial allocation $ ^{22} $ . Nevertheless, discussing the implication for public policy, Stavins points out that even with transaction costs, a trading system is likely to be less costly than mandating a technological standard.

Crals and Vereek (2005), compare the transaction costs of tradable permit systems with those associated with environmental taxes. Their analysis confounds the ‘conventional wisdom’ that environmental taxation is necessarily less complicated and entails lower transaction costs (especially set-up and negotiation costs) than a cap-and-and trade system. Polinsky and Shavell (1981) theoretically show that pollution taxes, like tradable permits, may result in different kinds of administrative costs, and, hence may affect the optimal tax level.

Betz (2005) addresses the differences between pollution trading and project based mechanisms (Joint Implementation (JI) and Clean Development Mechanisms (CDM) allowed by the Kyoto Protocol) in terms of their transaction costs. She notes that in baseline and credit scheme $ ^{23} $ transaction costs only occur if credits are generated, while in tradable permits programmes some of the firm's costs (e.g. setup costs and MRV costs) exist even without engaging in any trade. She concludes that baseline and credit schemes might lead to higher one-off administrative costs in setting up the project, but will have less ongoing costs when rules and standardized procedures become established. Woerdman (2001) similarly concludes that transaction costs for JI and CDM project will not necessarily be higher than those for pollution trading. This conclusion is based on the argument that transaction costs for CDM, JI and IET depend considerably on the market's design, and the political elaboration of the relevant documentation.

The ex-ante literature on tradable schemes usually neglects or incompletely anticipates the presence of transaction costs (Ellerman et al., 2005, Tietenberg, 2006). One of the early simulation studies (Capros and Mantzos, 2000) on cost savings of the EU-wide emission trading assumes positive administrative costs, while the allowance market is considered as perfect without any transaction costs. Later simulation studies (Klepper and Peterson, 2005, Peterson, 2006, Alexeeva-Talebi and Anger, 2007) only take into account the transaction costs associated with the project based mechanism (CDM and JI), suggesting that the transaction costs for the EU ETS are negligible.

Were transaction costs present in previous trading systems? We look at some empirical evidence of transaction costs in the earlier permit trading programmes.