Over Phase II of the EU-ETS (2008-12), nearly a third of liable companies did not record any transactions other than compliance-related. With an original analysis of Phase II transaction and compliance data, we first provide evidence of significant barriers to trading in the EU-ETS. We then develop a model of permit trading in presence of fixed and proportional trading costs in which firms can be initially over-allocated. Both market participation and clearing are endogenous and hinge on firms' characteristics and trading costs.This allows us to characterize the price responses to shifts in the trading costs and allocation levels analytically. We next calibrate our model based on Phase II market data. We find that the permit price is increasing in both fixed and proportional trading costs, which are in the order of k€10-30 and €0.1-1 per permit traded to match with observed prices and firms' market behaviors. We also quantify how supply-curbing policies like the Market Stability Reserve induce a larger price increase than under frictionless market conditions and analyze numerically how the allocation method influences compliance costs.