# **5.3. Nature of transaction costs under the EU-ETS**

Jaraite et al. (2009) identified TCs using Ireland as case study during the pilot phase of the EU-ETS (20052007). The study identified three categories of TCs. _(i)_ Early implementation costs (prior to 2005). These costs are fixed and include internal costs (e.g. management, staff training), consultancy costs and capital costs related to monitoring, recording and data and storage equipment. These costs are one-time costs and include the measurement of baseline emissions, as well as the functioning of the market as the two most important sources of TCs. _(ii)_ Monitoring, reporting and verification costs. These costs are periodic and include the preparation of an annual report which must be verified, along with the emissions reported. They represent a combination of internal costs and consultancy costs. _(iii)_ Trading costs. These costs are variable and are incurred only by firms that are trading their allowances. They depend on the number of transactions performed, the volume of the trade and the fees involved which can vary from one broker to another.

When analyzing the auctioning of allowances under the second phase of the EU ETS, Hepburn et al. (2006) address TCs in relation to negotiation over permits. Within this context, it is argued that political and policy decisions on how to apportion allowances across subject participants generate an intensive lobby activity by them that the aims to maximize potential benefits. Thus, all the resources devoted by subject parties; including policy makers, politicians, consultancy and researchers, to this relevant and critical rent allocation process represents an immense source of TCs (Hepburn et al., 2006).

Schleich and Betz (2004) examine TCs for small and medium sized (SMEs) companies under the EU ETS. In their study, two main sources of TCs are identified. The first group of TCs refers to those that emerged directly from the implementation of the Directive 2003/83/EC<sup>26</sup> establishing the EU ETS as such, namely the costs related to the application procedures for allocation and permits, costs associated with service charges for the accounts in the registry or costs for monitoring, and verification and reporting CO2 emissions; including costs related to national tax and balance-sheet issues of allowance trading. The second group refers to those TCs that arise from the process of maximizing the possible share of rents from the trading scheme as such. In this case, for instance, sources of TCs are related to the need of mapping out and assessing (potential) mitigation measures, carrying out dedicated studies (e.g. sensitivity analyses), searching for trading partners, and performing carbon transactions. Schleich and Betz (2004) argue that some of the TCs only accrue once at the beginning of the EU ETS. For example, costs for application procedures for allocation and permits. Others accrue annually, such as M&V costs, and yet others depend on the number of trades or the trading volume, such as costs for finding trading partners.

# **5.4. Estimated scale of transaction costs under the EU-ETS**

The magnitude of the initially addressed 72 companies, of which 27 have replied as well as the applied methodology (survey followed by face-to-face interviews) provide a good representation of the scale and

> 26 For details see http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:275:0032:0046:EN:PDF

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