Identifying Strategic Traders in China’s Pilot Carbon Emissions Trading Scheme

Abstract

This paper uses a sample of 1,867 firms that participate in the “Top-10,000 Energy-Consuming Enterprises Program” in China and aims to identify strategic traders in its pilot emissions trading scheme. Firms included in the ETS can exert their market power and manipulate allowance prices to achieve low compliance costs, which will consequently influence the effectiveness of this platform. This is of great importance to regulators or designers of this system in identifying these strategic traders and understanding their impact. We follow the basic principle proposed by Godal (2005) and develop a simple and implementable empirical procedure to study firm-level data from seven pilot programs in China. The results show that strategic traders exist with clear regional and sectoral differences. As a consequence of strategic trading by these firms, the overall volume of trading falls remarkably, with a clear increase in total compliance costs.