Among the diverse economic instruments to foster energy efficiency (EE) and climate protection, tradable certificates have been investigated for renewable energy, and the EU directive on an emissions-trading scheme for CO2 certificates has been approved in 2003. In contrast, tradable energy efficiency-or "white"-certificates have only lately been considered as a market-based tool to foster EE as compared with standards and labelling, for example. Theoretically, there is little doubt about the advantages. In practice, however, some fundamental problems arise. Critical issues are the design of an efficient artificial market for white certificates, its compatibility with the European emissions-trading system, the identification of a suitable target group for an EE obligation and the measurement of energy savings as compared with a reference use of energy. We use the theoretical framework of transaction cost economics to elaborate these issues. We conclude that transaction costs and investment specificity will restrict markets for white certificates in practice. Long-term contracts rather than spot trade will be the prevailing form of governance for EE investments. (c) 2004 Elsevier Ltd. All rights reserved.