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