Assessing the impact of the EU emissions trading system on CO2 emissions: a synthetic control approach

The EU Emissions Trading System (EU ETS) is not only the key climate change policy of the EU but also the first multinational cap-and-trade system. However, there are many critics on the effectiveness of the scheme. This study aims to evaluate the effectiveness of the EU ETS in terms of carbon dioxide emissions abatement during the 2005-2014 period using the synthetic control method. The synthetic control method eliminates the potential bias that can be caused by wrong comparison case selection for comparative case studies by using a data-driven procedure. The study firstly estimates per capita carbon dioxide emissions scenario in the absence of the EU-ETS for the EU-15 average. This counterfactual scenario is reproduced with weighted combination of per capita carbon dioxide emissions values of Japan, Israel and the United States. The difference in per capita carbon dioxide emissions between the actual and the counterfactual EU-15 gives the emissions reduction led by the EU ETS. The results show that the emissions during the first two years of the EU ETS are slightly higher than its synthetic counterpart. Although there are ups and downs in the emissions abatement led by the EU ETS, the observed emissions are lower than the amount that would have been in the absence of the policy between 2007 and 2014