A recent study from Etla shows that the EU’s Emissions Trading Scheme (EU ETS) has had an impact in decreasing the emissions in the EU’s production, but at the same time the emissions in the imports have increased. The CO2 intensity of imports is approximately 4 per cent higher due to the ETS. As a result of this increase, some of the gains from the decreases in emissions in the EU are lost. This new evidence of carbon leakage and the EU ETS is required for the design and justification of EU’s carbon border adjustment mechanisms. Previously no clear evidence of carbon leakage in the scheme has been found in empirical studies.
The European Union aims to be carbon neutral by 2050. To achieve this goal, the EU’s Emissions Trading Scheme (EU ETS), launched in 2005, is a key part, and it sets an upper limit for the amount of emissions in the sectors covered by the scheme. As climate policy tightens, the concern is that rising prices could lead to carbon leakage i.e., the transfer of polluting production to countries that are not committed to strong mitigation measures.
The concern is not unjustified, as some carbon leakage has indeed occurred due to the EU ETS, as shown in a recent Etla study ”Trade flows, carbon leakage, and the EU Emissions Trading System (Etla Working Paper 94)”. In the study Tero Kuusi, Research Director at Etla Economic Research, and Maria Wang, PhD Candidate at Hanken School of Economics, measure the implications of the EU ETS on carbon leakage during 2000‒2018.
Countries and sectors that are in the EU ETS have an approximately 4 per cent higher CO2 intensity of imports (tons of CO2 per 1000 USD value of imports) than the non-participant countries and sectors. On the other hand, the CO2 intensity of the EU export production has lowered.
The results imply that the EU ETS has had an impact in decreasing the emissions in the production in the EU even though imports are leaking.
For the value of imports, the results are not as clear as with the carbon intensity. However, the estimation still does imply a higher value of imports in general when trade is regulated by the EU ETS,
‒ Our findings are important, as previously no clear evidence of carbon leakage in the EU ETS has been found in empirical studies, says Ph.D Tero Kuusi, Research Director of Etla.
EU ETS has had an impact in decreasing the emissions in the production in the EU. However, as the carbon content of imports has increased, some of the gains from the emissions decreases are lost. This new evidence is necessary from the perspective of design and justification of unilateral measures such as the carbon border adjustment mechanisms or other trade restrictions on high-emission products from non-EU countries.
Kuusi, Tero – Wang, Maria: Trade flows, carbon leakage, and the EU Emissions Trading System (Etla Working Paper 94)
