Transaction costs in pollution markets: An empirical study

This paper studies a market in pollution permits launched in Los Angeles in 1994. This tradable permit marker has been projected to lead to substantia l cost savings due to the flexibility ii provides firms in terms of complia nce with environmental regulation. This paper shows that transaction costs can play an important role in the initial years of the program. The transac tion cost variables have been defined to include search costs and informati on costs. These costs are significant in explaining non-participation of so me firms in the market. The study also draws policy implications for the de velopment of future emissions trading programs.