Presenter: Santanu Kundu, University of Mannheim

Title: Internal Carbon Markets

Abstract: I document the existence of a novel market for internal resource reallocation within firms, namely, internal carbon markets. Firms that are part of the European Union Emissions Trading System reallocate carbon allowances between subsidiaries. They reallocate more carbon allowances from subsidiaries with generous free allowances to those with modest free allowances allocated by the regulator. In response to a policy change that restricts the supply of free allowances, subsidiaries of firms with internal carbon markets emit more carbon. The increase in carbon emissions is consistent with an undervaluation of these allowances relative to the market when carbon allowances are transferred internally. Overall, the paper highlights a novel mechanism that can limit the effectiveness of market–based climate policies.

Host: Thomas Kokholm