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Financial sector acts as institutional arbitrageur as it benefits from other companies’ lack of knowledge of emissions trading

Posted by gmarkets on 27 September, 2007

It is the fact that emissions trading has created an open market for emission reductions that discerns it from other forms of envi­ronmental regulation, wrote J Pinkse and A Kolk in European Management Journal (27/9/2007). Involvement of others: “It basically opens up the possi­bility for involvement of parties not affected by the regulation itself. The financial sector most clearly acts as institutional arbitrageur as it benefits from other companies’ lack of knowledge of emissions trading. Findings show that banks not only take on this role for trading in the EU-ETS, but also for making credits available from CDM and JI projects. With regard to the Kyoto mechanisms other types of firms could also become institutional arbitrageurs when they cre­ate emission credits for selling in the EU-ETS.

Unintended consequences: “In contrast, the institutional arbitrageur does not have a direct interest in the efficiency of the insti­tution as it only faces a weak constraint, but sees opportunities to gain from the institution in another way, be it financially or strategically. The arbitrageur gains from the unintended consequences that go with building a new institution by using the institu­tion for purposes it was not created for in the first place,” the authors added.
Reference: Pinkse, J. and Kolk, A., ‘Multinational Corporations and Emissions Trading’; European Management Journal (2007)

Erisk Net, 27/9/2007

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