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Does Common Carbon Pricing Reorient Trade? Partner Selection and the EU ETS

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Abstract

We study whether participation in the EU Emissions Trading System (EU ETS) reshapes the selection of trading partners, rather than merely raising production costs. A common carbon price works through two opposing channels: a cost channel that discourages trade with regulated countries, and a regulatory-alignment channel that lowers policy uncertainty between co-regulated partners. Combining a gravity framework with a difference-in-differences design over 1995–2020, we find that bilateral imports between EU ETS members rise by about 11 to 33% relative to non-participants (33% in a staggered Callaway–Sant’Anna design) while exports show no net effect. The import premium grows as the carbon price rises across policy phases and, in product-level data, is mostly concentrated in ETS-covered sectors, pointing to regulatory alignment rather than general integration. The results show that common carbon pricing can strengthen trade integration among insiders without necessarily reorienting trade away from unregulated partners.

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  • Angelo De Santis & Carla Guerriero & Antonia Pacelli & Carmine Russo, 2026. "Does Common Carbon Pricing Reorient Trade? Partner Selection and the EU ETS," CSEF Working Papers 784, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:784
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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