As refers to firms, their transaction costs are associated with setting up a monitoring system, reporting emissions, hiring a certified verifier every year and trading allowances if necessary. Some of these costs are incurred only once, in the initial stage of the policy implementation; however, the costs associated with monitoring, reporting and verification (MRV) are continuing costs. The costs related to trading are variable and depend on the number of transactions conducted and/or their volume.

Most of the theoretical and empirical literature addressed to this topic focuses on the trading transaction costs and their implications for market efficiency. The ex post empirical analyses focus on the experience with trading schemes in the US. There are no empirical estimates available of the three categories of cost incurred by firms in setting up, implementing (MRV) and trading in the EU ETS. Our study was designed to fill this gap. The objective of this study is to define the sources and nature of transaction costs, and estimate their magnitude. We are also interested to know how these costs were distributed across the preparation, implementation and compliance cycle, and to distinguish between total, fixed and marginal costs.

For this purpose we surveyed all the Irish companies participating in the scheme in the trial period (2005-2007). While Ireland may not be representative of all EU member states in some respects – the share of Ireland's $ CO_{2} $ emissions in the EU ETS is low (around 30%) due to the dominance of emissions from agriculture and transport, Ireland has had a rapid growing service economy, and the industrial output is concentrated primarily in non-energy intensive sectors – it is representative in others. First of all, every sector covered by the EU ETS is present in Ireland, with the exception of metal processing; secondly, Irish firms and installations are very heterogeneous in terms of size, and many firms have multiple installations, thus allowing a meaningful overview of how transaction costs differed across installation of different size. Finally, the relative small number of installations involved in the scheme allows for much more detailed investigation than would be the case for a larger country.

The remainder of this article is structured as follows: in Section 2, we review the theoretical and empirical literature on transaction costs. In Section 3 we present a taxonomy of transaction costs in the EU ETS. In Section 4 we present our methodology. The survey’s findings are presented and discussed in Section 5. Section 6 contains a summary of our findings, our conclusions, and policy implications for the future development of the EU ETS.

### 2. Environmental policy and transaction costs: theory and application

OECD (1993) defines transaction costs as “the costs involved in market exchange. These include the costs of discovering market prices and the costs of writing and enforcing contracts.” Another OECD (2001) definition describes transaction costs as “the costs of gathering information, making decisions/contracting, and controlling/policing”. The former characterization encompasses market related transaction costs; while the latter covers both policy and non-policy related transaction costs, a convention which we adopt in what follows.

Few studies attempt to conceptualise the transaction costs created by environmental policies. McCann et al. (2005) provide a comprehensive taxonomy of transaction costs and of the different methodologies for measuring them. In their framework, transaction costs are more agent and time specific rather than transaction specific, and they promote ‘absolute’ transaction costs’ evaluation. In contrast to their