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The Emissions Trading System of the European Union (EU ETS)

Author

Listed:
  • Mauro Bufano

    (Bank of Italy)

  • Fabio Capasso

    (Bank of Italy)

  • Johnny Di Giampaolo

    (Bank of Italy)

  • Nicola Pellegrini

    (Bank of Italy)

Abstract

Emissions Trading Systems (ETSs) are gaining importance as tools to implement decarbonization policies by means of carbon pricing mechanisms. Economic theory has demonstrated that such ‘cap and trade’ systems can be more effective than tax-based systems in pricing the externalities of pollution. The European ETS (EU-ETS), created in 2005 and currently the world’s most developed emissions market, is one of the pillars of the European transition to a green economy. Manufacturing firms and financial companies both participate in the market, with the latter significantly contributing to its liquidity, but also to the volatility of the prices of traded emission rights. In this paper, we review the literature on emissions trading systems (also known as pollution rights markets) and focus on the development of the institutional framework of the EU-ETS and on market-price trends and determinants. We also consider ETSs operating under other jurisdictions and the process of international integration of these systems.

Suggested Citation

  • Mauro Bufano & Fabio Capasso & Johnny Di Giampaolo & Nicola Pellegrini, 2023. "The Emissions Trading System of the European Union (EU ETS)," Temi di discussione (Economic working papers) 39, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:misp_039_23
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    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2023-039/N.39-MISP.pdf
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    More about this item

    Keywords

    emissions trading system; carbon pricing; financial markets; sustainable finance.;
    All these keywords.

    JEL classification:

    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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