Using the market at a cost: How the introduction of green certificates in Sweden led to market inefficiencies

The paper examines the transactions costs in the Swedish electricity retail market arising as a result of the implementation of a green certificate system. Since transaction costs cannot be measured directly, we analyze the margin between what the retailers pay for the certificates and what they charge the end-users for the certificate service. Our results highlight some costs of implementing new policy and the necessity of a careful regulatory design. We propose that the price transparency should be strengthened by, for example, shifting the quota obligation to the retailers and/or by including the pricing of the certificate-service in the end-user price of electricity. Furthermore, we restate the obvious fact that the number of policy instruments implemented in a particular market matters insofar that each and every policy will create transaction costs.