Transaction Costs

Transaction costs are a generic label for the cost associated with making an economic exchange, although the exact definition varies. They are sometimes sub-divided into search, negotiation and enforcement costs. Search costs relate to finding parties to an exchange – for example, brokers’ fees for exchanging stocks, and may also refer to the costs of finding an appropriate project to undertake in the first place. Negotiation costs determine mutually acceptable terms of trade, such as lawyers’ and consultants’ fees in relation to contracts (such as Emissions Reduction Purchase Agreements). Enforcement costs refer to legal fees and taxes levied by the institutions that regulate the exchange. In the case of carbon credits, these can include paying for validation and verification reports, as well as UNFCCC project registration fees and an adaptation levy (of 2 per cent) on the credits that are issued, as well as national taxes (such as Value Added Tax).

Transaction costs in relation to carbon offsets include any fees, taxes and charges that do not directly rate to activities that reduce emissions.