Emissions trading system: bridging the gap between environmental targets and fair competition

Abstract

The effectiveness of the European Emissions Trading System in supporting a level playing field while reducing total emissions is tested. While data show a robust impact on the environment as a steady decrease in carbon emissions is observed, it is reported that its ability to internalize emission costs may improve to better address the import of extra European generated emissions that negatively impact the economy when not properly accounted for. Analyzing data in six European countries between 2016 and 2020, the results suggest competitive advantages for industries with higher extra-European imports of inputs that result in biased production costs that, in turn, alter competitive positioning. The novelty lies in focusing on the threats to fair competition within Europe along with the well-known carbon leakage risk widely investigated by previous literature. Complementary policy tools capable of internalizing emission costs, regardless of their origin, are necessary to improve the healthy functioning of the system. In this regard, carbon taxation may outperform carbon border adjustment, as it is based on consumption patterns. Our results can aid policymakers in designing impact analyses aimed at limiting potential distortions to Europe's level playing field.

Assessment of the European Emissions Trading System’s Impact on Sustainable Development

“…This implies investing in clean technologies and encouraging more energy-efficient production practices [38]. In addition, the observed negative correlation between the relative sector size and the gap indicated that the sectors with higher emissions were effectively monitored [13]. There may be value in intensifying monitoring and regulatory efforts in industries with fewer emissions, which may escape effective tracking.…”

“…The variables used to develop the model were selected among those related to climate issues available in the EU dataset and are as follows: gap measured the difference between Ratio between free allowances and verified emissions. Source: Our own elaboration on the ETS data viewer and [13], and all industrial sectors, except combustions.…”

“…The European Union generates approximately 8% of global carbon emissions [13], and the European ETS is currently the world's largest carbon market [14]. A cap is imposed on the aggregate volume of emissions that can be produced annually, and it is consistently reduced over time [15] to reduce emissions in the medium and long term.…”

“…Verified emissions and free allocations. Source: Our own elaboration on the ETS data viewer and[13], and all the industrial sectors covered by the ETS, except combustions.…”

Meeting Decarbonization Targets: Techno-economic Insights From the Italian Scenario

“…With the aim of contextualizing the expected investments in technologies for the green transition, this section reviews the main drivers of decarbonization in light of recent European climate policies established in the Green Deal, including the fit for 55 package that aims to reduce net GHG emissions by at least 55% by 2030 and set ambitious decarbonization targets to be achieved by 2050 [1]. Existing policies and legislation are being updated to accommodate this transition [18], along with the design of efficient carbon markets that concurred in gradually reducing carbon emissions while preserving fair competition [19]. Indeed, finding an equilibrium between environmental and economic sustainability is challenging.…”