The European Union Emissions Trading System reduced CO2 emissions despite low prices

Bayer, P. and Aklin, M. (2020) The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences of the United States of America, 117(16), pp. 8804-8812. (doi: 10.1073/pnas.1918128117) (PMID:32253304)

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Abstract

International carbon markets are an appealing and increasingly popular tool to regulate carbon emissions. By putting a price on carbon, carbon markets reshape incentives faced by firms and reduce the value of emissions. How effective are carbon markets? Observers have tended to infer their effectiveness from market prices. The general belief is that a carbon market needs a high price in order to reduce emissions. As a result, many observers remain skeptical of initiatives such as the European Union Emissions Trading System (EU ETS), whose price remained low (compared to the social cost of carbon). In this paper, we assess whether the EU ETS reduced CO2 emissions despite low prices. We motivate our study by documenting that a carbon market can be effective if it is a credible institution that can plausibly become more stringent in the future. In such a case, firms might cut emissions even though market prices are low. In fact, low prices can be a signal that the demand for carbon permits weakens. Thus, low prices are compatible with successful carbon markets. To assess whether the EU ETS reduced carbon emissions even as permits were cheap, we estimate counterfactual carbon emissions using an original sectoral emissions dataset. We find that the EU ETS saved about 1.2 billion tons of CO2 between 2008 and 2016 (3.8%) relative to a world without carbon markets, or almost half of what EU governments promised to reduce under their Kyoto Protocol commitments. Emission reductions in sectors covered under the EU ETS were higher.

Item Type:Articles
Additional Information:Supported by funding from the British Academy Small Grant SG171349.
Keywords:Multidisciplinary
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Bayer, Professor Patrick
Authors: Bayer, P., and Aklin, M.
College/School:College of Social Sciences > School of Social and Political Sciences > Politics
Journal Name:Proceedings of the National Academy of Sciences of the United States of America
Publisher:Proceedings of the National Academy of Sciences
ISSN:0027-8424
ISSN (Online):1091-6490
Published Online:06 April 2020
Copyright Holders:Copyright © 2020 The Authors
First Published:First published in Proceedings of the National Academy of Sciences 117:8804-8812
Publisher Policy:Reproduced under a Creative Commons Licence

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