The European Union emissions trading system reduced CO2 emissions despite low prices

Patrick Bayer, Michaël Aklin

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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 CO 2 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 CO 2 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.

Original languageEnglish
Pages (from-to)8804-8812
Number of pages9
JournalProceedings of the National Academy of Sciences
Volume117
Issue number16
Early online date6 Apr 2020
DOIs
Publication statusPublished - 21 Apr 2020

Keywords

  • carbon markets
  • EU ETS
  • policy evaluation
  • synthetic control

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    Patrick Bayer

    Person: Academic

    Projects

    The Effectiveness of Carbon Markets in Europe, 2005-2012

    Bayer, P. & Aklin, M.

    1/01/1831/03/19

    Project: Projects from Previous Employment

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