The effect of transaction costs in CO2 markets: An Agent-Based Model approach

The Continuous Double Auction (CDA) is used in the CO2 markets. High market efficiency (close to 100%) is the most robust result in CDA human-subject experiments. However, the market efficiency decreases when monetary costs are imposed on transactions. In this paper the sensitivity of CDA performance to the imposition of monetary costs on the market is analyzed using an artificial agent-based model approach in order to evaluate the influence of the agents' behaviour. We find that the monetary costs reduce market efficiency according to both the theroretical and the experimental economics results. Moreover, our model provides new behavioural explanations of these effects that have practical value in the design and analysis of CO2 markets.