Strategic Aspects of Co2-Emissions Trading: Theoretical Concepts and Empirical Findings

Abstract

This paper investigates the strategic challenges for companies arising from the EU-wide greenhouse gas emission trading system (EU-ETS). Tools are suggested to help companies develop synchronised abatement and trading strategies in their dynamic decision making and facilitate overall cost-minimising behaviour. Furthermore, an EU-ETS simulation game is presented, which has recently been carried out in Germany, and which combines the advantages of a field experiment and a controlled laboratory experiment. The results of the game suggest that the proposed trading system will not automatically result in the expected cost savings. Different factors can be identified as the causes, such as specific design parameters of the EU-ETS, participants' lack of experience with a new instrument, their lack of trust in the market mechanism and risk aversion. The simulation results stress the need for companies to acquaint themselves with the rules and the range of possible strategies.