The EU Emissions Trading System (ETS) is the largest cap-and-trade scheme for CO2 emissions. This study evaluates the impact of Phase 3’s increased stringency, which significantly reduced the number of freely allocated emissions permits. Our analysis shows that purchasing additional EU Allowances (EUA) had a substantial impact on emissions reduction, with a conservative estimate of 422 MtCO2-eq, 4.3%-3.0% of EU ETS emissions in Phases 2 and 3 respectively. Derogation 10c, which allowed lower-income Member States to continue free EUA allocation, had a detrimental impact on emission reduction, leading to an increase in emissions of about half a ton for each additional allowance bought (instead of the decrease of half a ton observed in other countries). Our analysis finds no negative impact on output, capital productivity, or labour productivity. Our results support the reduction of free EUA allocation and tightening of regulations in Phase 4 of the EU ETS.
Third Time’s a Charm? Assessing the Impact of the Third Phase of the EU ETS on CO2 Emissions and Performance,2023