Economics, Econometrics and Finance
3 years ago

Boosting market participation enhances liquidity in emission trading schemes

Journal of Futures Markets
Improving liquidity in emission trading schemes
Jihun Kim, Kwangwoo Park

Paper Summary

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The article discusses how having a few powerful traders in an Emission Trading Scheme can reduce market liquidity by widening bid-ask spreads to maximize profits. By adding more participants, like derivatives traders, this liquidity problem can be improved. The European Union's ETS saw increased liquidity by attracting more participants during its transition from Phase 1 to Phase 2.