Factors determining firms’ trading decision in the Korea ETS market

The purpose of the emission trading scheme (ETS), a cost-effective reduction, can be achieved through the active participation of liable firms. Although there was a steady increase in the transaction volume in the phase 1 (2015–2017) of Korea ETS, allowance used in flexible mechanism such as banking outweighed the amount of trading. By analyzing the trading behavior of liable firms in the Phase 1 of Korea ETS, we find out the determinants impeding the cost-effective reduction through active market participation. According to our empirical result, the liable firms who perceive ETS as a burden, trust government policy continuity and forecast that allowance price would go up tend to bank remaining allowance. On the other hand, the firms who were allocated larger allowance are more likely to trade. This result shows that heavy emitters having larger allowance could have realized economies of scale in transaction cost for MRV or seeking trading partners. Thus, market liquidity will be enhanced through government’s support to reduce transaction cost for small emitters, discover clear price signal, and provide policy signals that ETS can be another business opportunity.