We develop an equilibrium model of emissions permit trading in the presence of ﬁxed and proportional trading costs in which the permit price and ﬁrms’ participation in and extent of trading are endogenously determined. We analyze the sensitivity of the equilibrium to changes in the trading costs and ﬁrms’ allocations, and characterize situations where the trading costs alternatively depress or raise permit prices relative to frictionless market conditions. We calibrate our model to annual transaction and compliance data in Phase II of the EU ETS (2008-2012) which we consolidate at the ﬁrm level. We ﬁnd that trading costs in the order of 10 k€ per annum plus 1€ per permit traded substantially reduce discrepancies between observations and theoretical predictions for ﬁrms’ behavior (e.g. autarkic compliance). Our simulations suggest that ignoring trading costs leads to an underestimation of the price impacts of supply-curbing policies, this diﬀerence varying with the incidence on ﬁrms.