The European Emissions Trading System: Economic Impacts, Political Dynamics, and Policy Pitfalls

Apart from being an obvious and significant environmental problem, climate change poses a unique set of economic problems due to the intertemporal nature of those who are responsible for producing emissions, and those who bear the costs down the road. Market-based solutions can facilitate the internalization of these costs associated to climate change. One such solution came in the form of the European Union Emissions Trading System (ETS) in 2005. This dissertation investigates the economic effects of this policy across three chapters based on empirical investigations. Chapter 3 explores firm-level economic effects of ETS regulation in Spain, echoing results from other studies which found positive outcomes in employment, revenues, and fixed assets, even in a credit-constrained and structurally-challenged economy. Chapter 4 looks at the issue of over-allocation of emissions certificates during Phase 2 of the ETS using a sector-based quasi-natural experiment. Using a new definition of the concept, we find evidence for substantial over-allocation amongst energy producers. Lastly, Chapter 5 investigates both economic and electoral effects of policy stringency at the regional level across Europe. Positive economic effects, as well as positive electoral effects for green parties in national elections, are found to be caused by higher ETS stringency, although the latter is not mediated by the former. Overall, the findings suggest that concerns regarding environmental policy in the form of negative economic effects and political backlash are unsubstantiated in the case of the ETS, while also identifying design flaws which may have impacted earlier stages of the scheme.