Improving liquidity in emission trading schemes

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This paper constructs a model of an Emission Trading Scheme (ETS) market using bid-ask spreads. We show that when such a market is dominated by a small number of traders with substantial market power, they tend to maximize their profits by widening bid-ask spreads, thereby reducing market liquidity. We argue that adding more market participants, including derivatives traders, can alleviate this illiquidity problem. Policy changes at the European Union's ETS illustrate our theory, as the market significantly increased liquidity by enacting liquidity-provision policies to attract more participants as it transitioned from Phase 1 to Phase 2.
Publisher
WILEY
Issue Date
2021-09
Language
English
Article Type
Article
Citation

JOURNAL OF FUTURES MARKETS, v.41, no.9, pp.1397 - 1411

ISSN
0270-7314
DOI
10.1002/fut.22220
URI
http://hdl.handle.net/10203/287223
Appears in Collection
MT-Journal Papers(저널논문)
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