Italian firms’ trading behavior in the European carbon market

Abstract This paper investigates the trading behavior of firms regulated by the European Union Emission Trading System (EU ETS). Focusing on the first three periods of the EU ETS (2005–2021), our study specifically analyses the factors influencing ETS firms’ decisions to participate in the emission allowances market and the intensity of their trading activities. To conduct this research, we employ a panel double-hurdle model and leverage data from the Italian section of the European Transaction Log, in conjunction with ORBIS Bureau Van Dijk data. Our findings indicate that transaction costs, such as information and search costs, and net position are the primary determinants shaping the trading behavior of Italian firms throughout all phases of the EU ETS. These results hold true even when considering buyers and sellers separately, as well as interfirm and intrafirm trades. In contrast, the ability to reduce emissions decreases the probability of market participation and trade intensity only for purchasing ETS firms, and it reduces both the probability and intensity of trade only for internal exchanges. Energy-producing firms engage more in buying allowances, while carbon leakage sectors firms are more likely to sell excess allowances. Furthermore, belonging to these sectors appears to have no significant effect on intrafirm trade. These findings suggest that policy interventions such as reducing information and search costs, enhancing market transparency, and introducing price management mechanisms could improve market efficiency and the overall effectiveness of the EU ETS.