Commodity Trading

Presented at VfS and IIPF 2024 and at the World Inequality Conference 2026. An earlier version circulated as “Profit Shifting via Carbon Emission Trading: First Indications”.

Abstract

This paper provides evidence that multinational groups use trading in the EU Emissions Trading System to shift profits to affiliates in low-tax jurisdictions. Carbon allowance transfers show patterns that are hard to explain by compliance trading alone: the share of volume traded within corporate groups is nine times what would be expected, transactions are concentrated in December rather than around the April compliance deadline, and more than two thirds of the volume goes to buyers that have never handed in an allowance. I show that these patterns are consistent with internal forward contracts priced to favour affiliates in low-tax countries. Such contracts have long been suspected as a channel for profit shifting in commodity markets but are difficult to observe. The EU ETS is unusual because its registry records every transfer between identified accounts. Linking these records to Orbis ownership data and hand-collected disclosures from trading hubs allows me to identify transfers that look like internal forwards. Groups using them have lower effective tax rates, and effective tax rates fall with the share of internal volume that is forward-like. In groups that trade this way, profits in the lowest-taxed affiliate respond more strongly to windfall profits from excess free allocations generated elsewhere in the group. After the EU centralised its emissions registries in 2012 and made quick round trips, a more easily detectable form of intra-group trading that can be used to shift profit, harder, round trips fell while forward-like trades increased. The results provide evidence of a previously undocumented channel of profit shifting and have implications for other commodity markets in which internal forward contracts remain unobserved.